A Not-So-Best-Buy?

In normal market environments many traders will have positions on both sides of the fence. The markets don't email you saying “I'm going to go down now. Get short!”. Therefore a seasoned trader may have long stock and/or bullishly oriented option trades, short stock and/or bearishly oriented option trades, and non-directional income trades on at the same time, adjusting the exact mix according to current conditions.

For example, if a trader normally maintains 10 open positions, and the market has a positive, bullish attitude, the positions may be 5 long stock/bullish option trades, 2 short stock/bearish option trades, and 3 income trades.

If the market is developing a negative attitude, then he or she may close the weakest long trades and put on two or three additional short trades. The mix may end up being 2 long trades, 5 short trades, and 3 income trades. If the market stagnates and looks like your teenage son in front of the TV, you might pare back both long and short trades and fly with just the income trades until something clearly changes.

But as I've said in recent newsletters, with the Fed's bond buying program, affectionately referred to as ‘QE', indirectly pumping billions a month into the market, short trades are risky. Fewer of them work out. The win/loss ratio on such trades falls. So in my newsletter I've concentrated on waiting for pullbacks to complete and then I get back to identifying good setups for bullish trades, instead of trying to trade the pullbacks.

I do keep an eye out for what would normally be good bearish setups. And even in this traditionally strong seasonal period, where the track records of many stocks show institutional accumulation through the rest of the year leading into January earnings reports, there are a handful of stocks that show up with track records of being sold off this time of year.

I've got one short trade to consider for those who like to have some short-side exposure in their portfolios. I want to emphasize that this is the first Friday of the month. The U.S. employment report comes out before the market open, and this one could be a market mover. Do not place any type of order before the market opens and then head off to work. You may not like the results.

Instead, watch how the market opens and responds to the employment report. If you are determined to make a trade today, at least wait until an hour after the open. Quite often, on days like this, the initial move tapers off, and may even reverse, after the first hour of trading.

Best Buy (BBY)

Best Buy is the drug dealer for tech-addicted people. You would expect its stock, BBY, to be a perennial  winner in the Christmas season. And this year, BBY has been a steady climber, with not even a single close below its 50-day moving average since it crossed above it in early January – until now.

BBY gapped down on November 19th on 470% higher than average volume, thrusting through the 50-day MA. Over the past two weeks, BBY recovered a bit, but it was on mostly below-average volume. Then yesterday, it gapped-down at the open and closed on the lows of the day.

This is one setup seasoned traders look for when trolling for short trades – a sudden heavy volume selloff followed by a weak rebound that looses steam as it enters the gap from the selloff.

The above setup isn't perfect. I would prefer less volume on the weak rebound and more volume on yesterday's reversal. And yesterday's reversal really needs at least another day or two of downside for confirmation. But for someone looking for a short trade, this is one of the best current setups.

Since I like to use historical track records to provide ‘tailwinds' to my trades, I checked the seasonal pattern for BBY. While BBY does have an upward bias over the next 6 months, a closer examination shows BBY's performance in recent years has been erratic to downright negative.

Over the next 2 weeks, BBY has fallen an average 7.3%, with losses in 24 out of 28 years. Of the past 11 years, 9 have been losing years with only one strong gain.

In fact, if you have shorted BBY over the next 2 weeks every year of the past 28 years, you would have had one of the better trading systems. I do not encourage using margin. But in practice, most accounts traders set up use margin, effectively providing leverage. If you short 100 shares of stock XYZ, your buying power is typically reduced by only 50% or so of the total trade value. Therefore, the profits listed in the trade simulation that follows, could have been much higher (this is only a theoretical investigation – past performance is not guarantee of future results).

I do not trust a manipulated market (I'm referring to the Fed's indirect pumping of money into the stock market). While I've been avoiding most short trades entirely, the ones I have considered I target only a few percent gain and quickly exit. It is all too easy to overstay your welcome on short trades nowadays. I target a few percent (not counting margin), expecting to hit it within a few days.

If BBY was shorted at the current 41.6, and only the lowest close of the past 3 weeks was targeted (38.71), that would be a 6.9% gain.

Now what if a reader agrees with my analysis above but prefers a lower capital investment? Today's Seasonal Forecaster newsletter provides an interesting option spread trade, offering a quick-in/quick-out trade targeting a specific profit.

Of course, there's much more you need to know and many more stocks you can capitalize upon each and every day.  To find out more, type in www.markettamer.com/seasonal-forecaster

By Gregg Harris, MarketTamer Chief Technical Strategist

Copyright (C) 2013 Stock & Options Training LLC

Unless indicated otherwise, at the time of this writing, the author has no positions in any of the above-mentioned securities.

Gregg Harris is the Chief Technical Strategist at MarketTamer.com with extensive experience in the financial sector.

Gregg started out as an Engineer and brings a rigorous thinking to his financial research. Gregg's passion for finance resulted in the creation of a real-time quote system and his work has been featured nationally in publications, such as the Investment Guide magazine.

As an avid researcher, Gregg concentrates on leveraging what institutional and big money players are doing to move the market and create seasonal trend patterns. Using custom research tools, Gregg identifies stocks that are optimal for stock and options traders to exploit these trends and find the tailwinds that can propel stocks to levels that are hidden to the average trader.

 

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