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A Big Short On Big Lots

07/09/08 09:27:46 AM
by James Kupfer

After a strong upward move over the last few months, is BIG in a position to short?

Security:   BIG
Position:   Sell

For the last few months, shares of Big Lots (BIG) have been moving strongly upward. Now, however, they may have reached a level where you should consider selling existing holdings and possibly initiating a short position.

Looking at Figure 1, the monthly chart, you can see a few things of importance. First, BIG is at the 61.8% Fibonacci retracement level drawn in this instance by taking 61.8% of the difference between the stock's all-time high and its subsequent low. The stock last topped at this same level, which also provides a significant resistance level to further upward movement. Finally, the Irwin stochastic indicator is significantly overbought.

FIGURE 1: BIG, MONTHLY. This stock is at the 61.8% Fibonacci retracement level.
Graphic provided by: Wealth-Lab.
Moving to the daily time frame (Figure 2), you can see more indicators that the stock may be ready to begin a downward path. First, drawing a trendline between all the recent lows of the stock, you can see five previous instances where BIG has bounced off the trendline.Three points is commonly thought to constitute and validate a trendline. Within the last two weeks, BIG has decisively broken through the trendline, indicating a possible change in direction whereby the old trendline now becomes a resistance line. Further, the Irwin Indicator is overbought.

FIGURE 2: BIG, DAILY. Is the stock ready to begin a downward path?
Graphic provided by: Wealth-Lab.
A rise in the broad markets may carry this stock with it at least temporarily, but this seems to be a good opportunity in which to short BIG. Stops should be placed somewhere above the June or 2007 highs.

James Kupfer

Mr. Kupfer is a market professional and amateur stock market commentator. Disclosure: It is likely that Mr. Kupfer has or will enter a position in any security he writes about.

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