section of Tim's post CF's
Weakness Is Strong and a further extrapolation of why I think CF Industries (CF) is a good short pick by Tim.
To Tim's post I replied: "Now THAT is a
nice looking short. Putting that on my watch list. Thanks Tim!".
Two replies to my own piqued my interest and prompted me to check my premises.
The first was DMA Trader:
why would you short something in a secular BULL market?
you are playing with fire
put it on your long list… 85 is support (chart here)
So here are the two points they brought up:
1. The broader market is in a strong
up trend. (A rising tide raises all boats.)
2. CF is
approaching a potential support level at 85. (Never short at support.)
greenbuckeye's chart at the link in his quote. 85 is a potential support area and could hang up any short initiated
above it. Give that point to the Bulls
and draw it on your chart as an area to watch if you're considering it a short.
Let's take on the first point.
broader market. In this case, I'm using the SPY as a proxy for the S&P 500
in the top chart and in the pane below the volume, I have a Relative Strength
ratio comparing the performance of CF to the SPX (S&P 500 Index).
As you can clearly see, something is not right with CF.
It has made a major departure from the rest of the market. It's performance
seriously lags the S&P 500's latest move. If you look at the price
performance over the past year, CF has been moving right along with the S&P
500 until March when it's personality charge.
Let's drill down further and compare CF to it's sector,
Basic Materials:
its sector, but again beginning in March, CF dove as the rest of Basic
Materials sector continued higher.
Relative Strength or the practice of comparing a stock
versus its market/sector/industry is extremely important when trying to trade
against the prevailing trend (in this case, shorting into a massive Fed induced
bear market bounce). If you're going to short, pick on the weaklings (i.e.,
laggards) and forget about shorting stuff that looks overbought.
CF fits the criteria of a market weakling and therefore
nullifies the first point in the bullish case. Bear market bounce or secular
bull market, it doesn't matter. CF is weak. Something is up, and I think CF's
poor performance relative to the market is the strong reason to consider it a
short.
When To Short it?
That's up to you and your trading style. My style is to
wait for a pullback, short underneath if it follows through to the downside and
trail it with a volatility stop. If you follow a system like Alexander
Elder's "Impulse" system, then it's a short at Monday's
open.
Good luck and good trading.
Jack Damn
=^.^=
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