Taking 3% Short Position as Cliffs Natural Resources Heads Lower

The markets rarely do what we want them to. Instead, they seem determined to act in a manner that causes us confusion, frustration, and pain. However, occasionally market activity does confirm our views and allow for profitable trades. When such opportunities occur, we must not allow them to slip away.

An example is a stock we have traded twice before in EPIC Insights-Cliffs Natural Resources (CLF). We have owned CLF for both fundamental reasons-it was cheap and would benefit from rising commodity prices-and for technical reasons-it was oversold and destined to bounce off support. These two transactions led to gains of 82% and 33% respectively. Now that this familiar pattern is repeating, we will trade CLF a third time.

Since January, CLF has topped out above $30 on four different occasions (blue circles). After each peak, the shares quickly reversed and gravitated toward support at $20 (green line). Typically, the shares will bounce off support (blue arrows) and retest the prior peak.

Last week, CLF hit a high point of $29.63 (black circle) and started to retreat. Although this peak is slightly lower than prior highs, the subsequent pullback has been well contained, a clear sign of a developing downtrend (red line). Such an event leads me to believe that the recent peak is the top of the cycle and the shares will move toward $22 over the next three weeks (red box).

Having made the determination that CLF will trade lower and a short position is warranted, our attention shifts toward risk and return. If the analysis presented here is incorrect, CLF should trade above $32 and break above the series of peaks that have been witnessed this year. However, if I am correct, CLF will trade to at least $22 and more likely gravitate toward long-term support at $20. Such price points offer a 13% risk compared to a 29% gain. Whenever I see the payouts skewed in our favor, I feel comfortable acting. I recommend a 3% short position in CLF as this week's technical trade.

Note: At the time of this article, I am short CLF.

Comments

[jimmy46]

In June & July you went short on V & POT,
no profit there, maybe you need to read different charts.

2009 Aug 12 02:26 PM

[peluso]

When idiots like Sean come out with stupid articles like this one. buy the stock to make money

he only wants to scare people

Belive he is short at 22 - 23

2009 Aug 12 03:28 PM

[peluso]

what a joke Sean. better cover

2009 Aug 12 03:29 PM