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Weak Relative Strength Stocks In The .SPX

08/18/11 08:48:01 AM
by Donald W. Pendergast, Jr.

We've seen a nice relief rally in the .SPX over the past few sessions. Now is the time to start getting your list of weak relative strength stocks to sell short list going again.

Security:   JNPR, JDSU, MWW
Position:   N/A

It's typical -- the market sells off hard, going into a terrifying tailspin until the point of maximum investor pain has been inflicted before stabilizing and rebounding a bit. Suddenly, it's almost like the darn thing never happened -- people are talking about "the buying opportunity of a lifetime," "scaling into the market," and "dollar cost averaging." But might such statements be based on overly optimistic expectations for the broad market over the next few months? Here's a closer look now.

FIGURE 1: WEAKEST RELATIVE STRENGTH STOCKS. The 10 weakest relative strength stocks in the .SPX hail from a variety of industry groups.
Graphic provided by: MetaStock.
Graphic provided by: MetaStock Explorer.
 
In Figure 1, you can see the list of the 10 worst-performing stocks vs. the .SPX over the last 13 weeks (one calendar quarter); the financial, tech, and advertising/media sectors of the market are well-represented, hinting at the broad-based nature of the selling pressure over the past few months. Here's the big idea here, and that is the fact that stocks that are weak tend to remain that way, offering shrewd traders the opportunity to consider using such stocks as short trading vehicles as the next market selloff (assuming it happens relatively soon) commences. Of course, you should already be relying on a good mechanical or discretionary trading methodology to help you better time such potential short entries in the days and weeks ahead, as such trading systems that can help provide you with the confidence that only comes with a proven back- and forward-tested trading history and its accompanying statistical analysis.

FIGURE 2: CBR, DAILY. The daily chart of CBR reveals an image of a stock under very heavy selling pressure. Further significant declines in CBR's share price in the near term would not be out of the question.
Graphic provided by: MetaStock.
Graphic provided by: WB: Keltner Bands from MetaStock 11.
 
One stock looking vulnerable here is CB Richard Ellis (CBR), a real estate sector equity that has taken a pounding over the past four months. Exceedingly weak versus the .SPX in recent weeks, the stock almost appears to be in the same horrific chart pattern mode that it was in back in the summer of 2008 as the stock market started to become unglued. See Figure 2.

Once it came in contact with the inner Keltner band, the stock started to get rid of shareholder value at an accelerated rate for what seemed like months. The stock is even more oversold now (being near its extreme lower Keltner band), which puts the stock in an even more precarious position, one that skilled short sellers will surely be looking at with great interest. Several of the other stocks on the list also have reasonably similar patterns forming on their own daily charts, so be sure to check them out, too.

Trying to prepare for the market's next move needn't be all that difficult if you understand that weak stocks tend to stay weak and strong stocks tend to stay stong. So when the broad market rebounds after a savage selloff, look to short the weakest relative stocks and vice versa.



Donald W. Pendergast, Jr.

Donald W. Pendergast is a financial markets consultant who offers specialized services to stock brokers and high net worth individuals who seek a better bottom line for their portfolios.

Title: Writer, market consultant
Company: Linear Trading Systems LLC
Jacksonville, FL 32217
Phone # for sales: 904-239-9564
E-mail address: lineartradingsys@gmail.com

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