SSS - Anticipating the Short Side During a Market Uptrend - Part 2

Published : December 14 2014 at 14:30 ET

On November 2nd we sent out a Short-Sale Set-up (SSS) report discussing the concept of anticipating the short side of the market during an uptrend in order that one might be prepared to act on the short side rather than re-act on the short side once a market breakdown becomes obvious. We looked at four stocks, Workday (WDAY), Tableau Software (DATA), Splunk (SPLK), and FireEye (FEYE)  all of which were rallying up the right side of big cup formations and conjectured that these may eventually develop as Punchbowl of Death or POD type set-ups based on the model of Yelp (YELP) which had formed a similar POD before it broke apart in September of this year. The idea of maintaining awareness of how various stocks might be setting up as future, potential short-sale set-ups depending on how they play out and observing this in real-time as part of the process of anticipating the short side is central to our short-selling approach. Members should go back and review that November 2nd report as background for this report where we will assess where these stocks are now within the context of that previous discussion. In all three of the stock charts shown below we are looking at the right side rallies of a big POD-like formation that also has some features of a giant head and shoulders which can be seen on a weekly chart. We leave it to the reader to investigate the weekly charts of each on their own, and for the purposes of this discussion we can focus on daily charts showing the detail on the right side peak of these current POD/Giant H&S formations.

The first to break down among these is Workday (WDAY), for which we sent out an SSS report on November 28th after it gapped down off the right side POD peak on a poor earnings report. As we can see on the daily chart, below, WDAY gapped down from the right side POD peak and closed below its 50-day moving average on that day, and on the next day moved just above the 50-day line where it became a short-sale at that point in the 87-88 price area. From there the stock broke below the 80 level earlier this past week, rallied up to the 200-day moving average on Thursday, and then reversed to make a lower closing low. Anticipating this as it moved up the right side of the POD would have enabled one to act quickly on the gap-down move around the 50-day moving average. In this manner we can see how WDAY has in fact played out as a short-sale target after we first began monitoring it in early November.

The second to break down is Splunk (SPLK), which gapped up on November 21st after an allegedly "strong" earnings report, only to reverse and close near its intraday low on heavy volume, as we can see on the daily chart, below. SPLK then tried to rally a couple of times into the 68 price level, only to fail each time before plummeting through the 50-day and 200-day moving averages earlier this past week. The stock closed Friday under the 200-day moving average, and we would use any small rallies up into the 200-day moving average, perhaps a little further should such a rally carry that far, to short the stock.

Tableau Software (DATA) has not completely come apart just yet, but as it moves up the right side of its potential POD formation we can see that it is starting to wobble a bit here as its most recent base breakout is starting to show signs of a potential failure. After a gap-up in early November that reversed to close near the intraday lows as it stalled out, the stock has chopped around for another 4-5 weeks and after a fake out breakout attempt on Thursday of this past week the stock has dropped back below the 20-day moving average. This is a short-sale point using the high of Friday in the 83-84 price area as a guide for an upside stop.

The fourth stock we discussed, FEYE, is much further down in its pattern and so we do not consider it as "ripe" of a short-sale target as WDAY, SPLK, and DATA given that they are all quite close to the right side peaks of their PODs. The reader may study FEYE on their own, but we should note that it also looks like it is ready to move lower and through the neckline of a giant H&S formation. In any case, by following these stocks over the past several weeks since we first issued that November 2nd discussion members hopefully gain an understanding of how short-sale targets must be anticipated and tracked. In this manner a budding short-seller of these names will be able to act in an anticipatory manner rather than reacting to general market weakness after the fact with a sort of "greed factor" and impetus that drives a sudden, reactionary desire to get short stocks. As the market begins to wobble off the peak, we can see how WDAY and SPLK were already showing significant topping signs several days/weeks before, and if the tide of the market continues to turn to the downside, these will likely continue lower in their patterns. We'll see how these names are doing a month from now in our next follow-up report.

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