This Week’s Stock Trading Outlook: Shorting The Bounce Into Resistance

Whether we have a intermediate-term bottom in place remains to be seen. Follow through this week would lead to a confirmed rally, and would draw more traders into the market. As the government works to stave off disaster, we will be receiving constant news flow regarding possible solutions, including specifics on bailout plans, mergers and acquisitions, and possibly a new stimulus package (or even a broader short selling ban). While news may prompt dramatic rallies, the outlook remains dire. Even if Paulson and Bernanke succeed in putting a temporary floor under the market, government actions will have the following likely effects:

- A long-term increase in inflation and devaluing of the dollar.
- A huge increase in government debt leading to significantly higher taxes in the US, and a transition away from the US as the central global economic player, and the dollar as the default currency.
- A continued diminishing of equity prices as the consumer gets squeezed by inflation, higher taxes, and rising unemployment. America’s loss of economic power will have ripple effects across the globe, resulting in reduced growth projections throughout the world economy.
- As the crisis continues, we are likely to see a flight to safety. Investors should examine their portfolios closely, including holdings they previously considered safe. Eric Roseman has some useful advice in this regard, urging investors to place cash balances in money markets that are designated “government” or “treasury”.

Equally, a government designated Treasury money-market fund, like Vanguard Admiral Treasury Fund (VUSXX), charging just 0.10% per annum ($50,000 minimum), or the Vanguard Treasury Money Market Fund (VMPXX), charging 0.24% per annum and requiring a $3,000 minimum investment, are ideal. Both funds are secure, won’t break the buck and will protect your assets. I’d scramble to place my liquidity proceeds in Vanguard before most U.S. banks, except J.P. Morgan.

I also recommend Bob Bauman’s cash protection checklist.

In the near term, a stimulus package, emergency rate cut, or additional short selling restrictions could trigger a more sustained rally. In any case, this is a market for short term trades, since news could move stocks in either direction very quickly.

Considering short term trades, stocks look likely to give back some of the gains from Thursday and Friday.

- SPY (SPY) has numerous layers of resistance just above the current price, including a declining 50 day moving average, and a trendline that held on Friday.

- iShares MSCI Emerging Markets Index (EEM) has rallied to near its prior breakdown level.

- iShares FTSE/Xinhua China 25 Index (FXI) bounced to an important breakdown level. This looks like a good spot to initiate a short position, or long FXP.

- PowerShares Aerospace & Defense (PPA): The aerospace/defense ETF may see a bit more buying, but this is a very bearish chart.

For individual stocks, I will be focused on shorting those that have bounced into resistance, or failed to participate in the rally.

- First Cash Financial Services (FCFS) has not participated, and saw selling on increased volume on both Thursday and Friday. I am already short this one.

- Autonation (AN): Autonation was up over 20% during the first hour of Friday’s trading, then closed flat just under the declining 200 day moving average.

- Unibanco (UBB) closed just below resistance on Friday.

- Rick’s Cabaret International (RICK) did not really participate in the rally, and has layers of overhead resistance.

- UAL Corporation (UAUA): Airlines have remained relatively strong through recent market turmoil, but that may change soon. UAUA is having trouble making progress over 14.00, and looks ready to give up some of its big price move off of the July low of 2.80.

- SkyWest (SKYW) was lower on increasing volume during the last two days of trading, and looks like a good short below Friday’s low.

- Tele Norte Leste Participacoes (TNE) closed at highs on Friday. I will be shorting further strength, particularly if it rises above 18.50 on decreasing volume.

- Gafisa (GFA) has risen to an important level of resistance, and looks good for a smaller short position. This stock is a whippy trader.

- Finish Line (FINL) looks like a potential top here, way above its January low of 1.48. It did not participate in the Thurs-Fri rally.

- CF Industries Holdings (CF): Fertilizer stocks may have a little more upside yet, but I will be watching for signs of weakness. CF faces significant resistance in the 126.00 area.

- The Templeton Global Income Fund (GIM): The Templeton Global Income Fund “invests at least 80% of its net assets in income producing securities, including debt securities of United States and foreign issuers, including emerging markets. Its portfolio includes government bonds and short-term investments.”

- Chart Industries (GTLS) looks like it may have more room to rally, but has considerable resistance in the 45.00 area.

- Mastercard (MA): I will be shorting strength.

- First Solar (FSLR) has bounced to resistance, and looks like a good short here.

- Ascent Solar Technologies (ASTI): Another solar with a rather weak bounce here into resistance.

- Canadian Solar (CSIQ): Ditto.

- Dress Barn (DBRN) attempted to rally late in the week, but closed flat on Friday below the 50 day moving average and broken trendline.

- IntercontinentalExchange (ICE) is providing a decent short entry here.

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