As the markets prepare for the ECB decision on rates and the monthly jobs report, more investment professionals are expressing their concerns over the market's upside potential. The new highs in both the NYSE Advance/Decline and S&P 500 A/D lines are bullish for the intermediate term but do not rule out a correction from current levels.
The Spyder Trust (SPY) is 1.4% above its 20-day EMA at $190.44 while a 2.6% drop would take it back to the monthly projected pivot support at $188.19. My analysis of both the technical and sentiment data shows no evidence at this time that we are completing a major top.
For the most part, those who have been fighting the last 100-point move in the S&P 500 have had a rough year but there have been some bright spots. I often look to buy stocks with a high short interest if the technical studies are positive, but when the technical studies are negative, a high short interest can often accentuate a stock's decline. These four stocks rewarded those who were on the short side last month.
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Chart Analysis: Rubicon Technology (RBCN) made a new high of $14.67 in March but has since dropped 48%. It was down over 22% in May.
- The short interest data shows that 24.8% of the shares have been sold short with a short ratio of 9.9.
- The short ratio is the number of days of normal volume trading that it would take to cover the short position.
- The stock broke the daily uptrend, line a, at the end of March before rebounding back to the daily starc+ band (point 1).
- The rally stalled just below the 61.8% Fibonacci retracement resistance at $13.30.
- This was the last chance to get out of longs or a good opportunity to sell short before the stock dropped sharply.
- The relative performance confirmed the price break by violating its support at line b.
- The RS line stayed well below its WMA until early May and the weekly (not shown) shows no signs of a bottom.
- The selling in March was heavy, which supported the bearish case as the OBV broke support at line c.
- The OBV has since formed a pattern of lower highs, line d.
- On a drop below the recent low at $6.93, the projected monthly support and weekly starc- band are in the $5.19 area.
Cliff Natural Resources (CLF) has been s stock I have been warning investors about for several years as it traded as high as $93.81 in early 2011. In early 2014, the technical studies suggested it would still decline further.
- The stock was down 10.5% in May with 33.7% of the stock's float on the short side and short ratio of 9.9.
- The daily chart shows a long-term downtrend, line e, connecting the October 2013 and January 2014 highs, line e.
- The shorter-term downtrend, line e, and the declining 20-day EMA have contained prices since early April.
- The break of chart support (line g) in April generated another sell signal.
- The relative performance dropped below major support in early 2014 (see arrow).
- The RS line shows a long-term downtrend, line h, which is consistent with a stock that has been weaker than the S&P 500.
- The RS line violated in short-term support, line i, in mid-April.
- Aspray's OBV Trigger (AOT) dropped sharply into the sell mode on April 1 and has stayed negative.
- The weekly starc- band is at $12.87 with the quarterly projected pivot support is at $12.27.
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Swift Energy Co. (SFY) is a small-cap independent oil and gas company that rallied up to the major 61.8% retracement resistance and the daily starc+ band in May before closing down 13.7% for the month.
- For SFY, 41.7% of float has been sold short with a short ratio of 11.1.
- The break of daily support, line b, signaled that the rally was over.
- The next daily chart support is at $10.51.
- The monthly projected pivot support is at $9.99.
- A break of this level could signal a decline to the weekly starc- band at $8.70.
- The daily relative performance also broke support, line d, in May.
- The rally failed well below the long-term downtrend, line a.
- The daily OBV has been acting stronger than prices but the weekly (not shown) did make new lows in May and still looks weak.
- A daily close above the resistance at $11.65 would be a short-term positive.
Aeropostale Inc. (ARO) is a mall-based specialty retailer that shows a well-defined downward trading channel, lines f and g.
- The stock was down 22.1% in May and 26.3% of the float has been sold short.
- The stock reached a high of $32.24 in early 2010 and is down 89% from this high.
- The long-term charts reveal that an H&S top formation was completed in May of 2011.
- Since mid-March, the stock has stayed below the declining 20-day EMA, which is now at $4.11.
- The daily relative performance has formed a multi-year downtrend.
- The RS line made another new low this week with near-term resistance at line h.
- Volume spiked to 37 million shares in March, which was nine times the average volume as ARO gapped to the downside.
- There was another volume surge in May as the stock again gapped lower.
- The daily OBV is well below its downtrend, line j.
- The monthly projected pivot support at $3.77 has been violated with the quarterly support at $1.95.
What It Means: Most investors use options to trade the short side of stocks as the potential of unlimited risk keeps them from selling stocks short. Most options expire worthless and professionals generally favor either option spreads or selling the stock short.
Of course, if you are selling a stock short, you need to have a firm stop in place. Rebounds within a downtrend, such as was the case with Rubicon Technology (RBCN), generally fail below the 61.8% retracement resistance. Stops above retracement resistance or pivot levels are a good way to limit the risk.
How to Profit: No new recommendation