Publish date:

A Gem of a Short Trade in Tiffany

The price action in this retailer presents a low-risk shorting opportunity.

On Wednesday, I wrote a piece about how the market is

a great forward-discounting mechanism, where prices often reflect future events. Well, there has been a lot of talk about the demise of the retail sector and how the consumer is really in trouble.

A quick look through many retail stocks supports that contention: They are weak.

One stock that I've been looking at is

Tiffany

(TIF) - Get Report

. This high-end jewelry store hit an all-time high in July.

However, after falling along with the rest of the market, Tiffany has been steadily climbing back toward the top shelf.

Take a look at the weekly chart below. You can see that the stock presents a pretty low-risk shorting opportunity because of the proximity of the current price to the level at which the short could be covered for just a small loss.

Notice how the stock fell almost 30% from its July high before reversing at about $40? That was a dramatic reversal of the uptrend that began in mid-2006.

If you believe that the retail consumer will be consuming less, then you must believe that Tiffany will be unable to reach the same level it peaked at in July.

Looking at the current price level, you can see how the stock is struggling with $52.50.

TST Recommends

But shares are still attracting some buying interest at the $50 level. So these two levels frame the short trade.

Consider shorting if the stock falls below $50 -- say, to $49.95.

And once that short entry is taken, put a protective buy-stop just above $52.50 -- say, around $52.60. This tight stop ensures only a small loss in the event that Tiffany challenges the July high.

A downside target for the short is $40, which is right where the stock bottomed a few weeks ago. Shares closed at $50.47 Wednesday.

Tiffany (TIF) -- Weekly

Updates on Previous Picks

  • First Marblehead: Still waiting for the stock to rally enough to trigger the short entry at $38. So far, it has been trading around $32. It could be that this support level will break down, but for the time being, the entry remains pegged at $38. Shares closed at $32.96 Wednesday.
  • McDermott (MDR) - Get Report has not come close to breaking below the entry point of $86.50, and is instead running higher. Take this one off the watch list because the expected weakness never materialized.
  • NCI Building Systems (NCS) - Get Report hit the stop at $49.10 and was closed out.

At the time of publication, Fitzpatrick held no positions in the stocks mentioned, although holdings can change at any time.

Dan Fitzpatrick is the publisher of

StockMarketMentor.com

, an advisory newsletter and educational forum dedicated to teaching effective risk management and trading methodologies to aspiring traders and investors. He is a former hedge fund manager and a member of the Market Technicians Association, and he now trades from his home in San Diego, Calif. While Fitzpatrick holds various securities licenses, he does not give recommendations to buy or sell stocks. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. He appreciates your feedback;

click here

to send him an email.