Here Come The Shorts
Shorts, put Honeywell International on
your radar. When a stock breaks like this one, the odds favor more downside to
come.
Honeywell International
(
HON |
Quote |
Chart |
News |
PowerRating) on
Monday warned that Q2 earnings will fall short of Wall Street estimates. The
diversified manufacturer and Dow component cited weak sales, aerospace parts
shortages, rising raw material prices and rising interest rates. Honeywell now
expects to earn between 73 and 77 cents a share in the second quarter. Analysts
forecasts averaged 78 cents, according to First Call/Thomson Financial.
The stock tumbled 8 1/18 to 48 1/2 on
10 times normal volume. Shares undercut their May 8 low of 40 5/16, recording an
intraday low of 38, a 52-week new low, before closing at 40 1/16. If that’s
support, it’s well camouflaged. The stock closed in the bottom quarter of the
day’s trading range.
The stock broke below its 200- and
50-day moving averages on June 7 and was trending lower when the bottom fell out
on Monday. Shareholders must feel badly wounded. There’s creates ample overhead
supply to thwart rallies. And as rallies fail, more shareholders could choose to
bail.
Honeywell shares are due for a bounce
to the upside. The key is to watch for the reversal, then prepare to short after
signs the stock has stalled and is resuming the downtrend. Of course, always set
a protective stop where you will buy back the shares and cover your short in the
event any short position rallies too far above your cost.
You might get a straightforward
pullback, giving you a chance to short if the stock turns tail and
undercuts Monday’s intraday low. The stock might attempt something more
ambitious, such as a two-thirds retracement. If you short retracements, make
sure the pattern is V-shaped. Sharp bounces from new lows tend to be
failure-prone. Gradual, U-shaped recoveries are more constructive.
Some shorting opportunities take a
couple weeks to develop. Jeff Cooper’s Lizard
setup is a possibility. This is strictly for day trading as Cooper has found it
has little follow-through power. The stock must open and close in the bottom
quarter of the session’s trading range. It must make a 10-day high. Sell short
the next day if the stock falls 1/8 point beneath the previous session low. Risk
no more than a point. If you’re not stopped out, cover at the close.
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