Playing Defense

This week, we are seeing the aftermath of a sharp, broad market selloff. This type of situation reduces the number of available short trade setups in individual stocks, because the triggers are usually taken away by such strong selling.

Therefore, taking on new short exposure when stocks are at lower levels after strong selling volume is a higher risk. The easy money in most of these setups has already been made. Trying to profit off of a downtrend continuation, while still possible, offers a much lower reward/risk ratio.

Given the market selloff last week, I do not see any good short setups for this week. I anticipate that the indices will catch some bids this week and offer up a number stocks that rally back to their former support, which could then act as a new area of resistance.

So I'll be looking for the following scenario next week when I scan for short exposure setups: weak stocks that broke a reasonably strong support and whose price is moving back to their former support level.

The idea here is that traders who are long a particular stock from just above that former support level should be looking to get out of the position at near-even or flat exits to minimize the loss. This should add to distribution pressure at the new resistance level.

I'll be searching for stocks that have a wide enough range from this week's support to anticipated resistance to increase the reward potential of the short setup. A wider range should offer up some good reward/risk ratios for stocks that are rallying back to resistance through the month of August.

Updates on Previous Picks

AMN Healthcare Services(AHS Quote) did not set up last week. Given the strong selling in the broader market and this stock's inability to close below $21, taking a short entry in this stock this week would be higher risk. Thus I am taking this name off of the watch list.

Charming Shoppes(CHRS Quote) moved under $10.55 without first offering an entry near $12. This trade setup is no longer valid, and the stock has been taken off the watch list.