Click on Chart to EnlargeToday's post is really an educational post that will cover a number of concepts relating to the kinds of patterns to look for in bear markets that will provide excellent short sale candidates or put option trades allowing you to make money as stocks decline in value.
The chart above is Verizon, ticker VZ.
The long term view is that the stock is below its 200 day moving average (MA), and the 200 day MA (red line) is pointed down. Also, the 50 day MA (green line) is below the 200 day MA. Since the October low, the stock has touched or crossed above the 50 day MA only to fall back below it 4 times. Now in the most recent advance the stock has moved back above the 50 day MA. Multiple failed rallies at the 50 day MA are classic for bear market rallies. A high volume close back below the 50 day MA would be very bearish.
Another key to look for on rally attempts is the volume. Notice how the peak volume on up days (the black bars at the bottom of the chart) was highest in October after the lows, then lower at the last week in November, and lower yet the last few days. Also today marked a new high coming off the October low, yet volume is not impressive. These are signs of waning demand at higher prices.
The stock has been somewhat range bound forming a rising wedge/triangle type pattern since the October lows. The bollinger bands overlaying the chart are the blue lines, and they provide a statistical range around price and should contain about 95% of all price on a closing basis. These bands tend to be a ceiling on rangebound market rallies. Price is pennies below the upper band right now, and the 200 day MA hovers in the same area. The 200 day MA is a typical resistance point for bear market rallies. A downtrendline is present at that level also.
An advanced concept to understand in technical analysis, particularly pertaining to short-selling is the idea of overhead supply. Basically, areas of previous consolidation or support that the stock has moved below provide a point where many shares were aquired by institutional investors (large funds, etc.). Since these investors are now at a loss, they will want to sell and "breakeven" when the stock comes back to that level from lower prices. Such is human nature. So any advance into prior consolidation levels will meet a plethora of sellers and keep pushing prices down. In reference to this chart, VZ traded in an extremely tight range from mid-June to mid September of this year. It is not often you see such a tight range. This occurred almost entirely between 33.00 and 35.00. Not totally visible on the chart is that there is a horizontal support line around 32.00 from prior significant lows. Price finally broke that level in September and is now coming back to that level. There is a saying that old support will become new resistance, and I have found that to be very true in a situation like this. Price is now just above 33.00 and should be meeting anxious sellers soon.
I did not include any technical indicators on this chart, but there is a major bearish divergence in momentum on this advance compared to the November advance. Also, the %K slow stochastics is overbought which tends to occur at significant price peaks both shorter and longer term.
Now the last and most key ingredient for a successful short sale is the state of the stock market in general. The market will need to show further declines to really drive this stock down. I believe that this will occur over the next several months, but any move below the November 20 market low will be good confirmation that the bear's appetite has not been fulfilled.
Now, I won't go into any detail on other stocks now, but I want to give a few stocks from different sectors that I think are going to go down for people to check out on their own.
The oil refiner group (XOM, CVX, SUN, SNP) look ripe to short-sell. Other stocks are GG (gold stock), WMT and PG (refer to prior posts).
If anyone wants more analysis on any of those stocks, please post a question or comment.
Pete
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