Short Trader: Bears Resizing NutriSystem - TheStreet

Short Trader: Bears Resizing NutriSystem

After some recent gains, NutriSystem bulls are back on a diet.
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Editor's note: Formerly, Dan Fitzpatrick's short trading ideas were available only to subscribers to TheStreet.com's Short Advisor. Now these picks are being offered to RealMoney and TheStreet.com readers.

Last week,

NutriSystem

(NTRI) - Get Report

, the weight-management service, announced earnings that surprised the Street. The stock gapped higher on the news, reversing much of the nasty downtrend that occurred in late January.

Shortly after earnings were announced, investment bank Lazard Capital reiterated its buy rating on the stock, raising its target to $75 a share. The basis for the upgrade was improving gross margins and strong growth in the men's program. Also, NutriSystem's board authorized a stock buyback program worth $200 million.

That sounds great, except the stock has been trading down ever since. So with a strong earnings report, a significant upgrade based on improving margins and a big buyback program, what's left to drive the stock higher?

The only thing I can think of is an announcement that the company is removing that irritating "Look at me, I'm in a size 2" commercial from the rotation. I don't really see that happening, so I believe the stock goes lower from here.

Let's take a look at the chart.

The recent downturn has been steadily closing the gap between $44 and $50 a share. Also, the relative strength indicator (RSI), a measure of momentum, could not even clear the midline at 50 before rolling over. (Remember, RSI ranges from 0 to 100. Levels around 70 or higher mean a stock may be getting overbought while levels around 30 or lower indicate a stock may be getting oversold.)

A good entry point to short NutriSystem would be on a move below Wednesday's low -- say, around $46.60. Shares closed the day just a penny above yesterday's low, at $46.65.

Once the short trade is opened, where should the buy-stop be placed?

NutriSystem (NTRI) -- Daily

The only way this short would be broken is if there is enough buying pressure to push the stock above the recent high of $50.86. So keep a buy-stop at around $50.95; if that stop is hit, you wouldn't want to be short. That's a risk of about 9%, which is just at the high end of my risk tolerance.

For the downside target, I suggest an initial target down at $37.

Updates on Previous Picks

Microsoft has moved back up near the short entry at $29.20, closing at $29.35 Wednesday. The buy-stop remains at $30.25.

Netflix , a short pick from last week, hit the alternative entry when it bounced up to $23.50 Tuesday. The idea was to short the stock as close as possible to resistance so the buy-stop could be tight. And that's what it is, with the stop up at $24.01. Shares of Netflix closed at $23.39 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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