Short Trader: DuPont's Likely to Deflate

It looks like only a matter of time until the stock loses its bounce.
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The last month has been challenging for bulls and bears alike. Just when the multimonth uptrend seemed destined to go on until Easter, the buying dried up and everything sold off in late-February. Since then, many stocks have been on a roller coaster that has left a lot of folks feeling a bit queasy.

One stock that's actually been fairly steady is

DuPont

(DD) - Get Report

. This company is in the basic materials sector, and its shares have been churning between $38 and $46 since mid-2000.

However, in early 2005, the stock broke out of that range and ran up to $55 before falling 30% over the next several months. Then beginning last September, the bulls once again started pushing DuPont higher.

But a look at the daily chart below shows that the stock failed to reach the prior high of $55 and is now poised to fall back down into the channel. Notice how shares of DuPont peaked along with the rest of the market in late February. Since that time, the stock has been churning between $49 and $51.50 or so.

During this period of churning, the Relative Strength Index, a momentum indicator, has been oscillating between 40 and 60 -- right in the middle of its range. (Remember that the RSI ranges from 0 to 100. A level around 70 or above indicates a stock may be overbought, and 30 or below indicates it may be oversold.) With DuPont right down at support, it looks like only a matter of time before the stock breaks down out of this channel.

But shorting right now would not give the best entry because the stock has already declined two consecutive days, closing Wednesday at $49.29. As such, there isn't likely to be that much more selling pressure before the shares get a bounce.

Also, yesterday's lighter volume relative to Tuesday's trading is an indication of declining selling pressure. As such, I'd expect a bounce within the next day or two. That's when I'd suggest shorting DuPont.

DuPont (DD) -- Daily

The preferred short entry would be on the next advance back up to test the 50-day moving average, which is currently at $50.66. Any move back above the level would be a short-entry trigger.

Once that short entry is taken, keep a stop just above $52, say, at $52.10. If the stock runs up that far, you wouldn't want to be short.

The initial target on this short would be around $45 a share.

Update on Last Week's Pick

  • Heelys (HLYS) : This position is working well. With a cost basis of $30.56, this short idea is up about 7% for the week. The current buy-stop at $32.05 should be lowered to $31.25 to minimize the loss on any snapback rally.Shares closed at $28.41 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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