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.
The Internet software and services industry group has been weak over the past month or so, moving lower while the rest of the market has been strong. One of the stocks that has been leading the charge lower is Digital River ( DRIV). The stock has already fallen about 8% this year, but it is now sitting right at support. If that support level holds, there is no short trade. But if it breaks down, then further downside is likely. First, note that Digital River reports earnings on the afternoon of Feb. 8. So this trade, irrespective of where the stock is trading on Feb. 8, is over by that date. Next, notice how the stock has been walking along the lower Bollinger Band over the past few weeks. That's what weak stocks do. But over the past few days, the stock has been catching a few bids and hinting at the possibility that the bulls will stand their ground. Only if the bulls have insufficient demand to absorb the heavy supply of stock will the downtrend end. So watch $50; it's a key level. Let's take a look at the chart. Notice how shares of Digital River are resting at the same level that marked the October closing low, $50. So far, that level is holding again, but the trend is down. So a prudent short entry would be on a print below $50, say, $49.90. If that occurs, the short trade is on, and a buy-stop can be placed at around $52.75. I'd look for a downside target on this potential short of about $40. Shares closed Wednesday at $51.85.
|Digital River (DRIV) -- Daily |
Updates on Previous PicksSeveral short ideas that I've featured remain active, but be aware that earnings can often throw a wrinkle into trades. Here's the plan for these picks.
- Amazon (AMZN): The cost basis on
this short tradeis $37.05, with a buy-stop remaining at $39.60. With online stocks eBay (EBAY) and Netflix (NFLX) trading higher after hours, the short trade in Amazon could be stopped out today. But the trend is down, so let the market say whether this trade is right or wrong. The price target for Amazon is down around $32. However, earnings are due to be released next Thursday, Feb. 1, so regardless of where shares are trading heading into the report, this short trade needs to be closed out by Wednesday afternoon. Amazon shares closed at $37.26 yesterday.
- Endurance Specialty Holdings (ENH): The cost basis for
this shortis $36.15. The stock has been declining, so adjust the buy-stop downward again, to $35.52. The only way that stop will be hit is if the downtrend is rejected by the bulls. Earnings are scheduled for Feb. 7, so this trade will be closed out by then. Shares closed at $34.43 Wednesday, and the price target continues to be $33.
- Kohl's (KSS): The cost basis for this short is $67.90. The stock, which closed at $69.58 Wednesday, is close to hitting the adjusted buy-stop of $70.25. But until that buy-stop is hit, the trade stands. The company is not scheduled to report earnings until March 1, so that's not an issue in this trade. The price target is down at $60.
- Microsemi (MSCC): The cost basis on
this tradeis $17.50, and the current buy-stop is $19.25. The shares had been moving in favor of the short trade until yesterday, when buyers began bidding the stock up and it closed at $18.08. Microsemi is scheduled to announce earnings today, though I haven't been able to find out whether the announcement comes before or after the bell. If you are still short this stock, consider closing the trade. The company could disappoint and drive the stock lower, but that smells a bit like gambling to me.