Negative-Market Short
By Wednesday, selling in the market had picked up, so instead of a flat, weak market, we were dealing with a negatively trending one. This means we want to become more cautious and selective with long positions.
After lowering guidance,
Panera Bread (PNRA Quote - Cramer on PNRA - Stock Picks) gapped down that day from $58.32 to open at $51.59. The story was negative, but certainly not terminal, so I would normally expect some kind of early partial recovery.
I like to watch negative news stocks during premarket trading to get an indication of how much potential interest there is from value shoppers. If, for example, PNRA hit a premarket low of $51, then recovered to open at $53, that would tell me the bargain-hunters were interested. I would then have looked for a pullback at the open, with support well above $51, and gone long at that first bottom. In this instance, however, PNRA opened only 46 cents above the premarket low; this is usually a bad sign.
In a negative market, there aren't as many bargain-hunters, so you have to consider what the market is doing at the time. That day, the Nasdaq also gapped down from 2611 to open at 2599, and after the open it continued selling straight down. You are not going to see many bargain-hunters in those circumstances.
So the best trade with PNRA was, again, to short the first small pop, which in this case, was at $52, another whole number. From there it continued down to $50, helped by the market negativity. The problem with shorting a stock that is already down that much, though, is that it's hard to judge its further downside potential.
It does pay, though, to pay attention to the market direction and align your trades with the trend. If your trading career is going to have any longevity, you need to learn to trade in any market.
This column was originally published on RealMoney on June 12, 2007 at 2:07 p.m. ET. For more information about subscribing to RealMoney, please click here.
Ken Wolff
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