How To Spot Stocks That May Be Topping Out
The
market has been oversold for several days now. The selloff has
persisted with little sign of panic and each attempted bounce extremely weak —
lasting no longer than a few hours. The Dow has now made a lower low for 10
days in a row. The fact that we remain oversold makes me wary of putting on new
shorts just yet. The recent action does give me more confidence that, should a
bounce occur, shorting could be a good play.
Last week I discussed potential
topping patterns. I believed that the market was topping out and that near
market tops the shorting opportunities with the most potential tend to be
leading stocks that are also forming topping patterns. I used HOLX as an
example of a stock that had looked to be topping out. One common question I
received was, “How do you find candidates such as this one?â€
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There are a few simple ways to
spot stocks that may be topping out.
1)Â Â Â Â Â
Scan through sector charts to find
sectors that may be topping. Many times stocks will trade in concert with their
group. If you spot a sector that appears to be topping out, then it can be
worthwhile to flip through the stocks within the sector to see if you can spot
any particularly attractive setups.
2)Â Â Â Â Â
When conducting your normal long-side
research, keep an eye out for stocks that may be topping. If you’re an
intermediate-term trader, then you probably already look through a fair amount of
charts of high rs/eps stocks. Since these are frequently leading stocks, they
will also be prime candidates for this kind of short trade. Â Look not only for
stocks that appear ready to break out, like you would normally do, but also keep
an eye out for those that appear ready to break down.
3)Â Â Â Â Â
Keep a list of long-side candidates
that you pass on to see if they begin to top. Intermediate-term traders may
pass on stocks for any number of fundamental reasons – the institutional
sponsoship wasn’t there, the debt was too high, the p/e was too high, the growth
was expected to slow dramatically, etc. The same reasons that may cause you to
pass on the long side could prove helpful when trying to short after a top.
Sector Action
Due to industry related news,
biotechs have been in a world of their own lately. Nearly every other area of
the market has been selling off, as the decline has been broad-based. This
includes larges-caps, small-caps, mid-caps, semis, retail, banks, drugs, energy
stocks and just about anything else you want to list.
Best of luck with your trading,
Rob
PS Get my Hanna ETF System
here.