Has Shorting Become Too Easy?

April 9, 2001
Dave Landry

Each evening we focus
on the most interesting aspects for the upcoming trading
day. The comments are based on observations of the nightly
updates of the Stocks/Sectors and Market Bias pages. They
are provided for educational purposes only and are not
intended to be direct trading advice. Also, keep in mind
that these remarks are made up to 12 hours in advance of the
markets opening. Therefore, overnight events may alter the
outcome of these observations.

On
Tuesday, after a strong opening, the Nasdaq sold off and began to flirt once
again with the
1700 levels. Then, early afternoon, it gained footing and rallied for the rest of
the day.

It looks like
the 1800 level will provide overhead resistance. This suggests yet another trip to
the old lows may be in the cards. I’ll ask Miss Cleo next time I call the
Psychic Hotline.

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It seems that lately, going
short has been as easy as it was to go long back in late 1999 and early 2000. What
concerns me is thatÂ the market isn’t fair. As soon as it gets
“easy,” it
quickly changes. Over the weekend, I began
searching for some words to describe the dangers of trading in such an oversold
environment. True, the trend is your friend, but oversold environments are prone
to correct against you. Then on Saturday morning, I read Boucher
(If you haven’t read Mark yet, I suggests you do so. Well done Mark.). Rather than
try to invent my own words, I thought I use his:

“There are few trickier environments than a deeply oversold bear market.
Such a market can rally extremely sharply at any time. The Naz could easily rally 20%-30% without interrupting the bear trend down.
There are false rallies that make one think maybe lower rates are finally beginning to take hold. And then some bit of bad news
will make the market re-think and send it to test or make new lows.”

So what do we do? I still think the short side remains
the logical play. However, I’d keep in light in here just in case we get a sharp
correction from this “deeply oversold bear market.”

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Perkin-Elmer
(
PKI |
Quote |
Chart |
News |
PowerRating), on the Pullbacks
Off Lows List, has formed a low level inverted “micro” cup
and handle. I flipped the chart over to keep you from having to stand on your
head to see it.

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Bea Systems
(
BEAS |
Quote |
Chart |
News |
PowerRating), on the Trading
Where The Action Is List, “tailed” higher intra-day but reversed
to close poorly. This action suggests that its downtrend remains intact.