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Short Ideas for 2010: Technical Analysis

L.A. Little's post on short ideas from a technical analysis perspective appeared yesterday on RealMoney . Click here for a free trial, and enjoy incisive commentary all day, every day.

Last week, I took a look at some long candidates for 2010, so here are a couple of short ideas (as well as another long idea -- I couldn't resist) for the coming year.

An O-Shaped Recession for U
By Howard Simons

I expect that as the year progresses, many more short-sided trades will materialize. I say this because my overall bias for the coming year is for a very two-sided market, unlike 2009. I would venture to guess that unless you're able to trade both ways in the coming year, you may very well again find yourself struggling mightily to churn out above-average profits.

As you know, trying to look a year into the future and discover trades that should benefit your portfolio for that longer time frame is difficult at best. Nevertheless, I will attempt to throw a few more logs onto the fire, starting with a long recommendation on Great Basin Gold (GBG). I am venturing back into the gold sector again this week for two reasons. First, I am quite bullish on this sector long term. Second, this small-cap exploration company looks to be on the verge of a major technical breakout.

GBG is a South African concern that has interests in gold, as well as silver interests in the U.S. and South Africa. Its charts are currently displaying huge volume accumulations as prices press up against the long-term price resistance.

GBG Monthly (Amex) -- Great Basin Gold
Source: Prophet.Net

What is most exciting about this chart, from my perspective, is that once these levels are cleared it's a double in price before the next major resistance target. That target happens to be the all-time high as well.

On a short-to-intermediate time frame, GBG is displaying a classical ascending triangle. This type of formation usually breaks to the upside.

GBG Weekly (Amex) -- Great Basin Gold
Source: Prophet.Net

The downside to GBG and last week's gold pick, Rubicon Minerals (RBY), is that the sector is currently under selling pressure, and that could persist for a few more weeks, or even months. After that, it likely will be a large and choppy trading range for most gold stocks until later in the year.

Gold stocks had a huge run-up this year but are now paying the price -- that's the bad news. The good news is that they are laying the groundwork for future advances. That takes time. For GBG and RBY, the technical formations are strong and the possibilities great. Thus, of all the more speculative exploration plays, these two gold stocks offer the biggest bang for your buck.

Turning to my two long-term short ideas, we begin with interest rates at the long end of the Treasury curve. The iShares Trust Barclays 20 Year Treasury Bond (TLT) is a tradable exchange-traded fund that is inversely tied to long-term interest rates. As rates rise, the TLT falls. A long-term chart shows that interest rates have generally fallen since the inception of this instrument; bonds have been in a bull market for the better part of two decades now.

TLT Monthly (NYSE) -- iShares Barclays 20+ Year Treasury Bond
Source: Prophet.Net

Looking at the long-term time frame on the 20-year bond, there are two points of interest that converge. The first is the long-term uptrending channel, which has been in place for the duration of this long bull run in bonds. Notice the high-volume spike lower that touched the $86 level back in June. The $86 level coincides with the bottom of the up channel. Thus, the first longer-term target for a decline in TLT is to the $86 level.

The second item of interest on a long-term time frame is the way bonds spiked outside the channel at the end of 2008. If you remember, that was when the Federal Reserve announced its intention to begin direct intervention in the credit markets. When prices spike outside a channel (as they did last year), the typical reaction is to break out of the bottom side of the channel before the reactionary move finishes. That leads me to believe that once the channel breaks, the downside target for the move becomes the next clear support area (highlighted on the chart).

TLT Weekly (NYSE) -- iShares Barclays 20+ Year Treasury Bond
Source: Prophet.Net

It's when we look at the intermediate term that we can visualize how this will probably unfold. First, we are in the process of finalizing this current leg down on the bonds. The AB=CD pattern targets the $89 level. Some backing and filling would be in order there. Volumes aren't sufficient to continue the downtrend at this time. In fact, it will likely take two or three times of hammering into the $89 level to build sufficient strength to break lower, given the high volume bar from June that it is attacking. Once that occurs though, the first longer-term target at $86 becomes the magnet to draw TLT lower.

The point of this exercise is to stress the idea that bonds are likely to provide a number of excellent shorting opportunities throughout the year. The overall trend for the past year has been lower on TLT and higher on interest rates. The desire is to short bonds each time they work their way higher in price and to cover a significant portion of those short positions into the key areas of support, then do that again and again as the year progresses.

You can use TLT or the 2:1 inverse trade of TLT, the UltraShort 20+ Year Treasury ProShares (TBT), which is my preferred vehicle.

The second and somewhat related short idea is the U.S. dollar, which is best viewed via the dollar index. The dollar is currently enjoying a short-term bounce after another longer-term decline. When viewed on a very long-term perspective, the dollar index shows two areas of significant resistance for this current countertrend rally.

The first and foremost resistance spans the price range of $80 to $81. That supply line is huge. It is hard to see the resistance area breached for any significant time period, but if it does, another resistance area lies about $4 higher.

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