In light of last Friday's
-induced rally, many stocks are showing new signs of life.
A number of names ramped more than 5% on Friday and closed near the high of the day. This type of afternoon strength tends to indicate more follow-through in the days ahead.
But I take the opposite approach when looking for shorts. When a stock rallies along with the rest of the market during the morning, but fades in the afternoon, that's a pretty good indication that buying interest is tepid.
One stock that appears to fit that bill is
Last Thursday, this engineering and construction company announced that it had been awarded a $50 million contract for engineering services in China.
So how did the stock react? It fell more than 5%.
One of the hallmark signs of a weak stock is when it falls on good news. That's what's happening with Shaw Group.
Furthermore, Friday's rally in sympathy with the rest of the market was not sustained. While the stock closed nearly 2.5% above its previous close, it failed to push above the 50-day moving average.
Let's take a look.
Shaw Group (SGR) -- Daily
Notice how the stock fell below short-term support at $50 last week. At the same time, there is a break of the 50-day moving average. Friday's rally was not sustainable, and the stock closed near the low of the day.
Still, Shaw Group looks a bit oversold, so you should be patient when looking to establish this short trade. I'd suggest waiting for the stock to retest the break of support and look for a short entry of around $48.
Once that short entry is taken, try putting a buy-stop just above $50, at around $50.25. A reasonable downside target for this short is $37.50.
Updates on Previous Picks
- AK Steel (AKS) - Get AK Steel Holding Corporation Report: I had suggested two possible scenarios for entering this short position: The first was a snapback to test the moving average at around $36, and the second was to see a break of support. The stock got its snapback, and the short trade was opened at $36. The current stop is at $39, but I would lower that to $36.70. The target for this trade is $25.
- Centex (CTX) : The position in this homebuilding stock was open for the past month, but rallied up to hit the lowered stop of $39.90 and was closed out for a small profit.
- First Marbleheadundefined: This stock remains on the watch list, waiting for it to rally to the desired entry point of $38. This stock is still almost $6 below the entry price, but I would leave it on the list and hope for some buying pressure.
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
, 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;
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