Monday, April 25, 2005

Analysis of a nasdaq downtrend, other musings


I haven't posted an update in a while and the reason is basically that nothing has changed. I look at the nasdaq chart included in this post and it is pretty clear to me that we are still in a downtrend, in all likelyhood perched up on this bear flag for another fall. The chart shows my two favorite moving averages on it: the 10-day simple moving average in blue, and the 50-day in red. What I find particularly interesting about the above chart is the way the nasdaq doesn't close above the 10-day moving average for two or more days when the 10-day is below the 50 day until the downtrend is threatened. The opposite is true when the 10-day MA is above the 50-day. The significance of my observation is this: the current downtrend is not in jeopardy until the nasdaq is able to close above its 10-day MA for two or more consecutive days.

Jacob Whitney, I'm glad you liked my list of short candidates. I have shorted a couple of them that look like they are perched to fall. If they do not fall and strength comes into them, it is clear to me that higher prices will follow and I will be forced to cover for a small loss. But through this entire bounce over the last couple of days, the only short I have covered is DECK after its post-earnings meltdown. While I would not be a buyer of the stock at its current level without seeing some strength first, I felt that buying to cover was in my best interest due to my inability to predict the behavior of that stock when it is so far from any important moving averages. The risk/reward for taking a few more points out of it is no longer tolerable in my opinion. However, that could change if I see a weak rally in the stock and it cannot retrace much of this avalanche over the next few weeks.

On the other side of the fence, my hedge on the longside is playing out quite nicely. On April 7'th, I posted here that I had bought a small position in NSI (Nutrisystems). Well the earnings came out tonite and it was a doozy. The stock is up over 20% in after hours. We'll see if the gains stick tomorrow. I plan to add to my position tomorrow at the open as the stock heads into new highs because it will undoubtedly be hitting all sorts of traders' screens. My escape plan is that if the stock cannot hold its morning gap-up, I'll dump the shares that I added in the morning for a loss no greater than 3 or 4%. What I would like to see happen in NSI tomorrow is the stock close around $10 or $11 a share on volume of 1 million shares or more. If it plays out like this, then we're seeing a scenario where interest in the stock is ballooning and it may just be the beginning of a move much higher over the next 12 months as institutions jump on board.

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