Falling Knives

  • August 2, 2000
  • Eddie Kwong

If you’re ever in the market
for short-selling opportunities, there are recurring patterns that you should
always be on the lookout for as markets fall. One of my favorite setups is the
retracement back to a breakdown level.

Here are three examples off today’s TradersWire:

11:19:22

Nasdaq Alert

The Nasdaq-100 Tracking Stock (QQQ)
is trying to break back above resistance at its old broken support level.
The QQQ broke down below this on July 28, 2000, but formed a trading range at its
50% retracement off the May 23, 2000, low and July 17, 2000, high.

13:15:18

Corning (GLW)
is trying to break back above its July 28, 2000, breakdown from its seven-week
trading range. Heavy distribution preceded the breakdown and it came off a
head-and-shoulders top pattern, so unless big volume can come in to support
Wednesday’s positive action, it’s on shaky ground. As this is being written, GLW
is surging.

13:58:04

Protein Design Labs (PDLI)
exploded from the open and has been drifting higher since then. But it may
run up against potential resistance at the level of its July 25, 2000, breakdown
below its 11-week trading range and its 50-day moving average. Traders will
watch for potential ricochet downwards.

These patterns don’t always work.
Much of its success is going to depend on whether the overall market weakness
follows through. But if it does, you have the opportunity to get in on some
shorts off pullbacks from lows. Ideally, you’ll want to see the following
ingredients at work in these setups.

  • A breakdown below a
    multi-week trading range on good volume.     I like to see the range be four
    or more weeks.

  • Distribution patterns during
    the formation of the range.     This is where you see institutional dumping
    as evidenced by multiple instances of price plunging on high volume.

  • Other patterns fit into the
    bearish picture.     In the case of Corning
    (
    GLW |
    Quote |
    Chart |
    News |
    PowerRating)    , the breakdown
    occurred off a head-and-shoulders top.

  • New resistance level (old
    broken support) has a confluence of other resistance factors.     Both
    Corning
    (
    GLW |
    Quote |
    Chart |
    News |
    PowerRating)     and Protein Design Labs
    (
    PDLI |
    Quote |
    Chart |
    News |
    PowerRating)     have the 50-day moving
    average right at the broken support level.

At this point, the patterns I’ve
shown you above are still in motion and I don’t know how they’ll play out.
Whether they work or don’t work, though, I think it’ll be an education for those
of us following them.

Until Thursday,

Eddie