More Downs To Kick Around
In the wake of fresh negative news,
Wall Street punished Yahoo and Lucent Wednesday, setting up both as gap-down
short candidates.
Both were already in major
downtrends and trading below downward-curving long- and intermediate-term moving
averages when institutions dumped shares at the open. Both closed in the bottom third of their trading ranges for the day. Both fell to new 52-week lows.
The way to short a gap-down short is
to sidestep the likely bounce, fueled by short-covering and knife-catching. Then
sell short once the downtrend resumes.
After Tuesday’s close, Lucent
Technologies
(
LU |
Quote |
Chart |
News |
PowerRating) warned that lower-than-expected optical sales and
decelerating sales of phone switch gear would pare down 4Q pro forma operating
net to 17 to 18 cents a share vs. 24 cents a year ago. Analysts estimates had
averaged 27 cents, according to First Call/Thomson Financial.
As you can see in the above chart, the
telecom-gear manufacturer followed through to the downside after a high-volume,
gap-down move on July 20 (see Point A in
chart). On Wednesday, the stock broke deep below support 28 1/16 (Point
B).Â
As a Lucent bear, I also like the fact
that telecom-gear cousin JDS Uniphase
(
JDSU |
Quote |
Chart |
News |
PowerRating) fell in sympathy, dropping 5%
on active trade despite analyst reassurances that Lucent’s problems were
specific to the company. A stock’s industry group can account for a substantial
portion of its price action.
To my eye, Yahoo
(
YHOO |
Quote |
Chart |
News |
PowerRating) looks
even more bearish, judging by the deeper close within the day’s range. The
company beat 3Q profit expecations but warned future performance may suffer as
Internet companies continue to slash marketing budgets or fold outright.
All stocks are speculative. In
any new trade, reduce your risk by limiting your position size and setting a
protective price stop where you will sell your new buy or cover your short in
case the market turns against you. For an introduction to combining price stops
with position sizing, see my lesson,
Risky Business. For further treatment of these and related topics,
check out the Money
Management area of TradingMarkets’ Stocks Education section.