Editor's note: Formerly, Chris Schumacher's short trading ideas were available only to subscribers to TheStreet.com's Short Advisor. Now these picks are being offered to RealMoney.com and TheStreet.com readers.
The plunge over the past week has shifted the markets away from orderly technical setups. Any time a major broad movement takes place, it typically either unwinds speculation in markets of strength or unwinds fear in markets of weakness.
When emotions run high, technical analysis of stocks offers very few clues for investors. Support and resistance levels simply do not hold as well as when the markets are reasonably stable.
In my screen of more than 250 stock charts Sunday evening for good picks, I was mainly looking for stocks that were in weak sectors and also did not participate in the market rally from July 2006 to February 2007.
Generally, when the relative strength of a stock is weaker than the broader indices or its sector, the stock tends to be one that speculators hammer first, trying to weed out weak-handed buyers. Many times institutional money will take profits from stocks that have met profit targets and lean on those that aren't doing as well in the same sector.
What I found in my screen was that out of these 250 stocks, those that were ripe for short setups had already triggered, meaning the best entries were no longer available. Not surprisingly, the Dow's 550-point drop negated many of the trade setups of those viable short candidates.
Stocks that are weak in an up market are usually the best short candidates. The other option for uncovering short trades is to look for stocks that have made a euphoric move -- a large spike higher -- within the past week.
Take a look at
( PALM) or
, both of which had recent strong moves upward. These stocks did well last week in spite of the downward broad market pressure. However, taking short positions on strong stocks has never been my favorite way to trade. It's a game of trying to pick the top. Plus, it's even dicier to try to do when these two stocks are bucking broader market trends.
So this week I will stick with the current open short ideas and watch how they play out. I do not believe any new short setups will be higher probability trades to start the week. In addition, on Monday morning as I'm writing this, the futures are already trading lower. This would further suggest that triggers for short setups would not be possible over the next day or two.
Updates on Previous Picks
Alliance Resource Partners is still open with the entry at $35.75. The stop is at $37.75, which offers $2 in risk. The first profit target is at $33.75, and a final profit target will be determined if the current support level at $33.50 fails to hold on a closing basis. Shares closed at $34.83 Monday.
Intermec remains open with the entry at $24.36. The first profit target of $22.25 was hit last Wednesday, and partial profits could have been taken at that price level. The stop should be lowered to break-even, and the final profit target is at $19.50. Shares closed at $22.19 Monday.
Neurochem ( NRMX), last week's pick, closed below $15 a share without first offering an entry. So this trade setup is no longer valid.
PetMed Express , an idea from Jan. 30, set up with an entry at $12.80. The stop at $14.25 offers $1.45 in risk. The first profit target would be $11.35 to satisfy the 1-to-1 reward/risk ratio. Partial or full profits could be taken there. If partial profits are taken, the stop can be lowered to $13, and the final profit target would be the September lows of $9.50. Shares closed at $12.02 Monday.
Regal-Beloit closed below $46 without first offering an entry. This trade setup is no longer valid.
RPC closed below $15.25 without first offering an entry. This trade setup also is no longer valid.
At the time of publication, Schumacher held no positions in the stocks mentioned, although holdings can change at any time.
Chris Schumacher is a financial trader, speaker, writer, co-author of
Techniques of Tape Reading
and and contributor to
. He has delivered seminars throughout the U.S. and is a featured speaker at trading expos. He is a graduate of Ohio State University and has served as a guest lecturer at Ohio State University's Fisher College of Business as well as the Center for Entrepreneurship. While Schumacher cannot offer specific investment or trading advice, he appreciates your feedback;
to send him an email.