A Long And A Short

Don’t look in a rear-view mirror.
Leadership could come from new names. Now, on to Monday’s news movers. 

Internet Security Systems
(
ISSX |
Quote |
Chart |
News |
PowerRating)

and NOCpulse, a newly launched provider of outsourced Internet infrastructure
management services, Monday announced that they are joining forces to deliver
managed security services to customers. NOCpulse will add ISS’ line of managed
security services to its offerings.

ISS jumped 6 15/16 to 98 15/16 on 1.1
million shares, twice its usual trade as averaged over the past 50 sessions. The
stock emerged above a low cup-with-handle pattern. As it is still trading below
its mid level, I would not include it on my watch list. However, the stock has
assembled some healthy technical signs — as of Friday’s close, Relative Strength of 87 for the past
12 months, 91 for the past three months, trade above its 50- and 200-day moving
price averages. Over the past month, accumulation days have outnumbered
distribution days.

Assuming ISS gets its 12-month RS up
to 90 or higher, and assuming I found nothing better to buy, I would look for
entry points after the stock cleared resistance at 108 3/4, which ISS
encountered on July 14 (see black arrow in the above chart). This also would get
the stock past its mid level of 96 1/16. 

The mid level represents the halfway
point between the peak and subsequent trough in a correction-recovery base. By
insisting that potential buys clear their mid levels as well as 50- and 200-day
moving averages, the intermediate-term momentum traders wait for their target
stocks to prove the ability to clear overheard resistance resulting from selling
by weak holders who use rallies to exit. 

Shares of VA Linux Systems
(
LNUX |
Quote |
Chart |
News |
PowerRating)

gapped own 12 5/8 to 17 3/8 on volume of 10.2 million shares, more than six
times its usual trade. The carnage followed a warning from the developer of
software for the Linux computer operating system that Q1 results would not meet
expectations. The stock was already in a long-term downtrend that has carried it
below its 200- and 50-day moving averages, and it closed in the bottom half of
the day’s range. This makes VA Linux a candidiate for a gap-down
short
strategy.

All stocks, of course, are risky. On
any new trade, be sure to limit your position size and set a protective price
stop where you will sell your buy or cover your short to protect yourself
against severe losses. For an introduction to combining price stops with
position sizing, see my lesson,
Risky Business
.