Short Verizon

05/09/08 08:59:46 AM

by Alan R. Northam

All indicators point toward Verizon as a possible shorting candidate.

Security: VZ
Position: Sell

Figure 1 shows the daily price chart for Verizon Communications. This chart includes the 50-day and 200-day moving averages along with the Elliott wave count showing waves 1 and 2 as being complete. In addition, the daily price chart also shows a dead cross where the 50-day moving average crossed below the 200-day moving average, signaling the beginning of a bear market trend. Below the price chart, I have shown volume, relative strength index (RSI), slow stochastics, and the relative strength indicator.

FIGURE 1: VERIZON, DAILY

Graphic provided by: StockCharts.com.

The first piece of evidence that Verizon is a shorting candidate is the dead cross. A dead cross is the point at which the 50-day moving average crosses under the 200-day moving average and signals the beginning of a bear market trend. With this in mind, any rally attempt must be considered a bear market corrective rally and not the start of a new bull market trend. The second piece of evidence is the completion of Elliott wave 2. A bear market trend will last for five waves of which waves 1 and 2 are now complete, leaving wave 3 down, wave 4 a second corrective wave, and wave 5 down. Thus, the major direction of this market is still in the downward direction. The third piece of evidence is that Verizon has now bounced off its 200-day moving average and appears to be headed downward. The fourth piece of evidence is the lack of volume.

Volume has been weak during the complete advance from the mid March lows. This evidence points to the current rally as a corrective rally and not the start of a bull market uptrend. The fifth piece of evidence comes from the fact that RSI has crossed back below its 80% line, indicating that Verizon is now starting to sell off.

The sixth piece of evidence comes from stochastics, which has also crossed below its 80% line, also indicating that Verizon is starting to sell off. And finally, the last piece of evidence comes from the relative strength indicator. The relative strength compares Verizon to the market sector to which it belongs. This comparison shows that Verizon is weaker than QQQQ, indicating that Verizon is a sector laggard. All the evidence points to the fact that Verizon is a good candidate to sell short.

Looking at the risk-reward ratio of such a shorting opportunity the risk is that Verizon could turn back upward and cross back above the 200-day moving average, which is currently at $40. With the current price of Verizon at $38.28, the risk is $1.72. The reward is that wave 3 down should end at $19.84. Wave 3s are typically 1.618 times the length of wave 1, subtracted from the high price of wave 2 (39.94 - (1.618 x (45.04 - 32.62)). This gives us an overall risk-reward ratio of 11.54. To me, the risk is well worth the reward, making Verizon a good candidate to sell short.

Note: The average directional movement index (ADX) and moving average convergence/divergence (MACD)(not shown) are lagging indicators and have not as of yet issued a sell signal. These indicators will not issue a sell signal until the downtrend in Verizon is well on its way. The sell signals from these indicators are more reliable, mainly because they are issued after the trend is well developed. However, the risk is higher, should the market turn against the trade and the reward is smaller once the move has run its course. In this setup, use these two indicators as confirming indicators and not as trading signals.

Trading stocks can result in loss of capital, and any decision to trade this ETF is your own and not a recommendation from me. I am showing this trade setup for educational purposes only.

Alan R. Northam

Alan Northam lives in the Dallas, Texas area and as an electronic engineer gave him an analytical mind from which he has developed a thorough knowledge of stock market technical analysis. His abilities to analyze the future direction of the stock market has allowed him to successfully trade of his own portfolio over the last 30 years. Mr. Northam is now retired and trading the stock market full time. You can reach him at inquiry@tradersclassroom.com or by visiting his website at http://www.tradersclassroom.com. You can also follow him on Twitter @TradersClassrm.

	Garland, Tx
Website:	www.tradersclassroom.com
E-mail address:	inquiry@tradersclassroom.com

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Short Verizon

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