Middling Sectors Offer Nice Shorts

This isn't the kind of statistic you'd expect to see when a leadership group starts a major rally. To me this indicates we're in a stock-picker's market, in which longs and shorts can make money as long as they match their trading strategies to the right plays. In this regard, let's review of a selection of weak stocks that are setting up nicely as short sales.

Short-sellers get into big trouble trying to pick a top in strong stocks. A more profitable approach is to limit trade entry to sectors that are showing relative weakness and active selling pressure. On the flip side, they should avoid oversold market groups such as homebuilders and financials, where the short side is overcrowded.

This leaves a handful of mid-performance sectors, in which investors took their best shots after the August recovery but now find their portfolios bleeding at a moderate pace. Retail, semiconductors and health care names come to mind in this regard. So let's fire up the database and pick out five good short plays from these sectors.

Big Lots rallied from $10 to $36 in a strong uptrend that ended in May of this year. It sold off in an A-B-C correction over the summer, breaking 200-day moving average support during the August meltdown. The subsequent recovery stalled at $32, which marks the 62% retracement of the downtrend. Price has been moving lower for the last month.

The volume bars reveal that selling pressure has now outpaced buying pressure for many months. The latest breakdown at the 200-day moving average sets up a test of the summer lows at $23. Longer term, this stock may be carving out a broad double-top pattern that will give way to more violent downtrend that could drop price into the mid-teens by early 2008.

Bon-Ton Stores moved sharply higher in a six-year uptrend before topping out at $57.66 in March. It's been moving lower in a steady downtrend since then. The stock bounced with the broad market in August, but the subsequent recovery failed right at resistance at the 50-day moving average. Price is now testing the summer slow.

Look for two-month support at $17.50 to break in the next one to three weeks. This violation should be followed by a downward surge that drops price into 2005 support near $15. It's unlikely that this level will hold the persistent decline, which might carry as far as 10 bucks after the Christmas shopping season has ended.

Boston Scientific has been moving lower in a wicked downtrend that began at $45.70 in 2004. The stock bounced at $14.43 in September 2006 and dropped back to this support level twice, before breaking it decisively in July. The ensuing selloff ended in August at $12.11, with price moving higher in a bearish flag pattern.

The weak recovery pressed above broken support but ran into a wall of resistance at the 200-day moving average. Price has now dropped back to support at the 50-day moving average, which could break at any time. Despite the multiyear beating, it looks like this stock is setting up a renewed decline that could drop it into single digits in the months ahead.

Tessera Technologies charged up to a rally high at $46.98 in early 2005 and pulled back in a long correction. It returned to this level in May of this year and ran into a buzzsaw of selling pressure. The stock finally rolled over in a pullback that accelerated over the summer. That breakdown violated 200-day moving average support in August.

The stock bounced higher with the broad market through September before the rally failed at the July breakdown gap and resistance at the moving average. This sets up a retest at the summer low and eventual breakdown that might drop the stock into broader pattern support in the mid-$20s.

Novellus Systems has been a chronically weak performer in the broad semiconductor group. The stock hit a swing high at $35 last December and has been moving lower in a choppy downtrend since then. It broke 200-day moving average support decisively in July before bouncing at $25.50 in mid August.

The recovery has evolved into an ominous-looking bearish flag pattern. Notably the last buying surge failed right at the 200-day moving average, with price dropping into flag support during Wednesday's chip decline. This is setting up an eventual breakdown that could drop the stock into 2006 support between $20 and $22.