Stock Trade of the Week: Buying the Selling in Homex Development
Shares of Homex Development Corporation (NYSE: HXM) have been trading in bear market territory for nearly a year, slipping below their 200-day moving average in the second half of February 2011. HXM reached it low at the end of November, after losing more than half its value.
Homex is a homebuilding and construction company that specializes in affordable and middle-income housing in Latin American countries like Mexico and Brazil. And while the company has been mired in a bear market for months, the stock – like homebuilders in the United States – has been enjoying a resurgence of buying interest over the past several weeks.
More specifically, the stock has been on a tear, rallying by more than 45% from late November to early January. But this has not prevented traders from being able to take advantage of instances when HXM has moved too far, too fast to the upside. And the stock’s most recent rally into overbought territory below the 200-day moving average was just another example of how it has been done.
HXM had closed higher for three days in a row when it earned out lowest “consider avoiding” rating of 1 out of 10. This was a signal for conservative traders and active investors that HXM had climbed to levels where, historically speaking, sellers have tended to become aggressive in knocking the stock down.
Traders using intraday entry strategies to take advantage of any follow-through strength were able to take short positions in HXM on the following day, as traders continued to press their bets, sending the stock deeper into overbought territory and increasing the likelihood of a short-term reversal.
That reversal came just two days later, as traders and active investors took advantage of th strength in the stock to sell. Traders who were able to take short positions in the stock on the day following its downgrade to 1 out of 10 locked in gains of more than 3% as HXM sold off and closed below its 5-day moving average.
Part of the reason for using a variety of strategies to grow and manage your money is that this practice keeps your trading portfolio exposed to diverse trading opportunities that any single strategy may not uncover. With most traders in a bullish mindset on over the past week, the idea of taking advantage of market strength to sell short overbought stocks allowed traders to collect early gains in the short-term correction in Homex.
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David Penn is Editor in Chief of TradingMarkets.com