I continue seeing weakness in the markets even though the indexes keep rising. You know it is a bad move to go against the trend so I am not recommending shorting but I think this is not a good time to own stocks. I trade the short to intermediate trends so I’m referring two months or less, if your time span is longer, meaning six months, one year or more, I have nothing to tell you. What will happen in six months from now, who knows? What will happen in the following weeks still nobody knows but trying to predict it is what I do. Sometimes I’m successful, sometimes I’m not, the important thing is being right more times than being wrong.
I continue to see weakness in energy, mining and metals, retail and technology, financial and healthcare are still strong so they are sectors to avoid for the short side.
If the frail sectors keep trending lower in the following days maybe they will drag down with them all the other sectors and then, paraphrasing Samuel Sullivan, one by one, they will come to our side, and all who have gathered, will be, well, weak. If that happens be prepared for a strong pullback in the markets.
FCX (Freeport-McMoRan Copper & Gold) is a company I shorted based in the following unsophisticated analysis:
Stocks have the tendency to retrace from one third to two-thirds of the prior movement before resuming the trend. If this is a well defined situation it is assumed that the next movement will come close to duplicating the previous one.
FCX made a 6 month high on January 11 at 90.39, then the stock went down to 66.5 on February 4, surpassing the older low of 75.63 that it made on December 17 and establishing a potential downtrend.
The down leg went from 90.39 to 66.5 or 23.89 dollars down. Then the correction move took the stock up to 83 on March 17. That is 16.5 dollars up, almost a perfect 2/3 retrace movement.
Measured move technique will put the next leg down all the way to (83- 23.89) or 59 dollars for a stock. That is the down target. The risk is over 83. I shorted at 79.75 looking for a potential 25% gain with a 6% risk, a four to one reward-risk ratio.
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