Last week I mentioned that the market was oversold and that the resulting pressure made new short exposure setups higher risk.
This was simply because the broader market had a higher probability of showing a sharp relief reversal and pushing most setups outside of risk parameters rather quickly. The only options short traders had last week were to sit on the sidelines or to look for entries that moved back to a former resistance level and enter there.
Given that the markets in the August period tend to move outside of the normal risk parameters to higher levels of risk, I elected to stay away from the markets last week in anticipation of a trading environment with a lower probability of risk this week.
Unfortunately, last week's price behavior didn't resolve any of this angst for new short positions. However, the relief rally did finally let a little steam out of the selling pressure. This should offer a better opportunity to find short exposure setups for stocks that are weaker than the broader market and that have a chance to move back to a resistance range for potential entries.
could fit these criteria. This media company has been weaker than the broader markets since its highs over $14 in late 2006. The steady downtrend channel that remains prevalent shows that distribution pressure is still strong in this stock.
The only negative to the downtrend channel is that the last time the stock price broke the support of this channel, there was a strong move higher to the channel resistance. This gives entry strategies that are on the break of support a higher risk of failing to yield a move toward profit targets. This scenario should instead command a move back to resistance for an entry strategy.
In the case of ValueVision, a move back to $11.50 with an invalidation level just above $12.25 would be the better setup.
The risk of 75 cents would require a move back to $10.75 from $11.50 to fit the 1-to-1 reward/risk ratio. If this occurs, partial profits could be taken there. The final target would be placed at the support of the downtrend channel at $9.75. If the price moves under $8.60 without first offering an entry, this setup is no longer valid. Shares closed at $9.20 Monday.
ValueVision Media (VVTV) -- Daily
At the time of publication, Schumacher had no positions in stocks mentioned, although holdings can change at any time.
Chris Schumacher is a financial trader, speaker, writer and co-author of
Techniques of Tape Reading
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