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Another Shot at a Short Sale in Lam

A snapback in Lam Research would offer another chance at a low-risk short trade.

Lam Research

(LRCX) - Get Lam Research Corporation (LRCX) Report

was downgraded Wednesday by investment bank Merriman Curhan Ford because of concerns about slowing spending in the memory space.

I'll look at this stock as a potential short in a minute, but first I want to go over a couple of trading points that apply to Lam.

First, the obvious: The ideal time to be short is before a stock gets clobbered, right? True, but the second point may not be so obvious to many.

Just because a stock has been slammed does not mean that the opportunity to short the stock is gone. Rather, only

that

prior opportunity to short the stock is gone.

When an uptrending stock rolls over and finally breaks down, a certain amount of dip buyers will still be around waiting to grab the stock at a discount. That buying halts the initial decline and sends the stock back up to test the prior high.

That test presents the next opportunity to short the stock. Why? Because there will typically be plenty of folks who failed to sell the stock before it rolled over, and they are now unhappy they are holding a loser. They will be more than happy to sell the stock if it rises back to their purchase price.

Let's see that in action with Lam Research.

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On the daily chart we can see how the stock ran up from $43 to $56 before rolling over. During the past week or so, the decline picked up steam. Then yesterday, the bulls finally capitulated as the stock gapped down on heavy volume at the open.

But the close at $51.68 Wednesday was in the upper half of the intraday range. That's bullish, and I wouldn't suggest shorting this stock now. Instead, wait for the stock to climb up to just below $54 -- say, around $53.80 -- before shorting.

Lam Research (LRCX) -- Daily

Once the short entry is taken, I suggest putting a fairly tight buy-stop on the trade at around $56.05.

The downside target would be about $47. The stock was at that level in March, so it's not much of a stretch to believe that the stock could return to that area again.

Updates on Previous Picks

  • Akamai Technologies (AKAM) - Get Akamai Technologies, Inc. Report: This trade set up on a break below support, at $42.35. The current buy-stop should be set at $44.10. Akamai closed at $42.87 Wednesday.
  • Goldcorp (GG) is still on the Watch List. Continue to wait for this stock to run up to $25 before shorting. Goldcorp shares closed at $23.32 Wednesday.

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;

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