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SSS - Thoughts on the Short Side for Tuesday, August 9th, 2011

We have never seen a drop in the market off the peak like what we've seen over the prior nine trading sessions. This sell-off has actually been worse than last year's "Flash Crash" sell-off in late April/early May 2010, and it is even worse than the initial sell-off seen in late 2008. Many leading stocks have been decimated, and a fair number of have broken down to or below their 200-day moving averages. 

Would-be short-sellers should keep in mind that at this precise juncture the short side of the market is very risky, as the market is primed to stage a reflex rally from here given the sharpness and steepness of the preceding sell-off.

In March/April 2000, which this sell-off reminds us of a little bit, the market broke off a little double top in late March and the NASDAQ plummeted 28% in just seven days. On the seventh day, April 4th, 2000, the market closed well off its lows, creating a huge "hammer" type formation on that day by closing at 4148.89 after hitting an intra-day low of 3649.11. The market then rallied for the next three days before rolling over again and finding new lows at the 3227 level six days later. Assuming that we should have a rally of at least 2-3 days here, short-sellers should be attuned to the market's position, keeping track of it in conjunction with reflex rallies in potential short-sale target stocks, such as PCLN. It is possible that in a sustained bounce in the general market indexes, PCLN could move well above its 50-day moving average in the process, so for now it is largely a waiting game. As more potential short-sale target stocks move up into potential resistance we will likely consider the short side much more viable. For now, let the market do what it needs to do, which is rally for a period of time that is currently unknowable with respect to its duration, and have patience to let optimal set-ups come to you rather than trying to force the issue too soon.

This information is provided by MoKa Investors, LLC DBA Virtue of Selfish Investing (VoSI) is issued solely for informational purposes and does not constitute an offer to sell or a solicitation of an offer to buy securities. Information contained herein is based on sources which we believe to be reliable but is not guaranteed by us as being accurate and does not purport to be a complete statement or summary of available data. VoSI reports are intended to alert VoSI members to technical developments in certain securities that may or may not be actionable, only, and are not intended as recommendations. Past performance is not a guarantee, nor is it necessarily indicative, of future results. Opinions expressed herein are statements of our judgment as of the publication date and are subject to change without notice. Entities including but not limited to VoSI, its members, officers, directors, employees, customers, agents, and affiliates may have a position, long or short, in the securities referred to herein, and/or other related securities, and may increase or decrease such position or take a contra position. Additional information is available upon written request. This publication is for clients of Virtue of Selfish Investing. Reproduction without written permission is strictly prohibited and will be prosecuted to the full extent of the law. ©2024 MoKa Investors, LLC DBA Virtue of Selfish Investing. All rights reserved.
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