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.
Since the beginning of the year, the bears and bulls have jousted over Regal-Beloit ( RBC - Get Report), which manufactures electrical and mechanical motion-control products. The bears have knocked the stock off its December 2006 highs of $54.50 to Monday's low of $45.95. The most recent price action shows two strong selling phases, which can be seen on the daily volume chart below. The latest increase in selling volume has been stronger than any other selling phase in the past year. So the bulls are forced to step up here and begin accumulation. Otherwise, the hidden support level at the 200-period moving average will fail and lead to a downtrend continuation signal. The widest accumulation range has formed between $40 and $54 a share. In between these two levels is a lot of noise, which is displayed by strong price spikes in both directions. These random large price movements make it more difficult to keep tighter stop-loss levels. Often, this type of volatile movement takes out a position before the stock resumes the desired direction. To compensate for this increased risk, traders should decrease the share size of their position. So for Regal-Beloit, instead of taking your usual position, I would recommend reducing your capital risk to 50% or 75% of your normal position. The ideal entry strategy for this stock would be to take an entry closer to resistance at $50. I prefer taking entries closer to resistance to lower the point-risk per trade. In addition to reduced capital risk, an entry near a resistance or invalidation level provides more profit potential, even if the price simply retests support. In this case, I would like to see the 200-period moving average support hold and create a move back up to $50. The stop should be placed at $52.25, offering $2.25 in risk. The first profit target should be placed at $47.75 to satisfy the 1-to-1 reward/risk ratio. Partial profits can be taken here.
| Regal-Beloit (RBC) -- Daily |
The second profit will depend on how well the 200-period moving average holds as support. If the stock price closes below $46.50, the probability for a downtrend continuation signal becomes stronger. In that event, the ideal exit strategy would be between $43 and $43.50 on the rest of the position. If the stock closes under $46 first without offering an entry, this trade setup is no longer valid. Shares of Regal-Beloit closed at $46.08 Monday.