Winning in a Weak Market With the Short Side

After a solid month of rallying on air, sellers finally materialized Monday, knocking the major indices below the short-term moving averages. But what really struck me was Tuesday's action: Volume was generally higher, but price declines were minimal. A heated battle was clearly being waged, with no clear winner. If anything, I'd chalk that one up to the bulls because they were clearly put on the defensive after Monday's selloff.

That said, I think the short-term uptrend is basically busted, and now any attempted rally is likely to be met with selling. So I've found some potential shorts that should do well in a weak market environment.

Today, let's look at Blockbuster (BBI - commentary - Cramer's Take), Biomet (BMET - commentary - Cramer's Take), MGM Grand (MGG - commentary - Cramer's Take), California Pizza Kitchen (CPKI - commentary - Cramer's Take) and Pharmaceutical Resources (PRX - commentary - Cramer's Take).

Blockbuster

Blockbuster demonstrates another way to detect an impending change in trend besides violation of support. Here we can see how resistance was established by three separate points along the ascending trend line. But in April, price began declining. The subsequent peaks failed to reach the trend line.

At the same time, the relative strength index, or RSI, broke below the uptrending support line, confirming that Blockbuster was about to get busted. Money flow is now just moving into bearish territory, and accumulation appears to have peaked. It could make a good short now, with a stop around $17.50 or so.

Biomet

Biomet is back at the $27 level. This has consistently acted as support, so I'll be curious to see whether Biomet makes a stand there again. With RSI trending lower (confirming the decline in price) and money flow revealing more selling pressure, any close below $27 may be a good short entry. But once the trade is entered, a prudent stop would be around $28 or so; I'd place a tight initial stop on this volatile stock. That way, you'd avoid losing a lot of money if the stock whipsaws too much.

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Dan Fitzpatrick is a freelance writer who trades for his own account. His columns focus on quantitative strategies for trading and investing. Fitzpatrick is a member of the Market Technicians Association and authors The Stock Market Mentor, a newsletter focusing on the proper use of technical analysis for trading and investing. At time of publication, Fitzpatrick held no position in any stocks mentioned, though positions may change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. While Fitzpatrick cannot provide investment advice or recommendations, he welcomes your feedback.