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Another Shot at a Short Sale in Lam

Dan Fitzpatrick

Lam Research (LRCX Quote) was downgraded Wednesday by investment bank Merriman Curhan Ford because of concerns about slowing spending in the memory space.

I'll look at this stock as a potential short in a minute, but first I want to go over a couple of trading points that apply to Lam.

First, the obvious: The ideal time to be short is before a stock gets clobbered, right? True, but the second point may not be so obvious to many.

Just because a stock has been slammed does not mean that the opportunity to short the stock is gone. Rather, only that prior opportunity to short the stock is gone.

When an uptrending stock rolls over and finally breaks down, a certain amount of dip buyers will still be around waiting to grab the stock at a discount. That buying halts the initial decline and sends the stock back up to test the prior high.

That test presents the next opportunity to short the stock. Why? Because there will typically be plenty of folks who failed to sell the stock before it rolled over, and they are now unhappy they are holding a loser. They will be more than happy to sell the stock if it rises back to their purchase price.

Let's see that in action with Lam Research.

On the daily chart we can see how the stock ran up from $43 to $56 before rolling over. During the past week or so, the decline picked up steam. Then yesterday, the bulls finally capitulated as the stock gapped down on heavy volume at the open.

But the close at $51.68 Wednesday was in the upper half of the intraday range. That's bullish, and I wouldn't suggest shorting this stock now. Instead, wait for the stock to climb up to just below $54 -- say, around $53.80 -- before shorting.