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CHART ANALYSIS


When is it Safe to Short a Stock? Air Canada May Be Losing Altitude

08/08/02 08:09:23 AM
by Gary Grosschadl

Since topping out at the $8 area, Canada's dominant airline is now in a potentially bearish pattern - a descending triangle.

Security:   T.AC
Position:   N/A

Aggressive short-term traders could short this failure at the trendline top shown belown on Air Canada's daily chart. Also supporting this short are the overbought and downturning stochastics, and the directional movement's bearish action. Failure for the DI's (the red and green lines on ADX indicator) to do a bullish cross has bearish consequences. Note how the past three stochastic turns from above 80 (overbought zone) resulted in tradeable downlegs in the short term. The danger would be a stochastic reversal from higher levels as happened last May.

For this aggressive short-term short to be worthwhile, the stock would have to crash through the 200-day EMA again, possibly resulting in a test of support at $6. At any rate this short-term play should be handled as before - cover the short at the low stochastic turn from 20 or below (oversold level).

Graphic provided by: stockcharts.com.
 
The safer and more prudent longer-term play would be to wait for the breakdown of this descending triangle (if this indeed happens) which could occur as the $6 support is breached. Ideally, volume should surge higher at this breakdown point. By measurement, the decline could be as much as 2 points bringing the stock down to $4 -- down to longer-term support. However this may be overly ambitious as there is a likely balk around the $5 congestion zone. Wherever the stock decides to turn back up, there should be various signs for the technical trader to take his or her cues.



Gary Grosschadl

Independent Canadian equities trader and technical analyst based in Peterborough
Ontario, Canada.

Website: www.whatsonsale.ca/financial.html
E-mail address: gwg7@sympatico.ca

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