YGGDRASIL

Weakest of the Weak - Short Sale Ideas for the New Millenium.

January 2, 2000

A bear needs the discipline to wait until the institutions are obviously selling a stock before shorting it. As with any other investment, the idea is to identify a trend and then go with it. You don't short a stock just because it is overpriced.

All of the above stocks except AOL are in the NDX.

However, many of the NDX parabolics simply are not ready to short, even though they are completing picture perfect 5 wave Elliot impulse structures. Examples are CMGI, Yahoo (YHOO), JDS Uniphase (JDSU), Qualcomm (QCOM), Cisco Systems (CSCO) and a host of others. In addition to the parabolics, you have the "Spikers," Microsoft (MSFT) and Dell (DELL) which have very weak charts but spiked in the last two weeks of the year to new highs. They look like "pump and dump" plays by the institutions, but don't be lured into a premature short. Bet with proven weakness.

Shorting weakness is tricker than it looks. The problem is that falling stocks have a habit of doing so in three waves. First wave down, second wave up or sideways, and third wave (often the biggest) down. When this third wave (the second movement downward) loses momentum, it is a high probability bet that the correction is over and the stock will rise.

Thus, above all, you do not want to sell short at or near the end of the third wave. It is a bad bet.

The best place to short is during the second wave rebound just as the 3dma turns south for wave 3. That is the high probability bet. You have evidence of weakness in the first wave down and you sell as wave two fails to attain the old highs (or starts fading after a sideways move, as you will see in the LCOS chart).

You should log on to:
IQC.COM Charts
and look at the chart patterns for the above stocks. When you first log on you will see a plain line chart of the Dow Jones Industrials. I prefer to select 120 periods rather than 180 and candlesticks (which have more information than closing line). I then select volume as the first indicator, RSI as second indicator and OBV as the third.

Then I will type in the ticker for each of the above stocks and then select weekly to get the big picture, then daily, and then hourly charts to focus in on shorter time periods.

The key is to be careful "chasing" the stock downward. Look at the daily chart for AOL. You will notice that it looks like we might be at the bottom of a third wave down. However, when you go to the hourly chart you see a more complex picture. You see a first wave down and then a sideways pattern at the $86 level. The ideal time to short it would have been on Dec. 22 or 23 at the $87 level. Then a third wave down with a sideways pattern at the $82 level, and then a continuation of the downside action. It looks like this is a five wave impulse down which projects to the $68 level, or perhaps lower.

As always, this is a judgment call. But if you look at the weekly chart, you will see that AOL is forming an ugly double top extending back to April, and has lost momentum here. The institutions are likely to keep selling until the stock has retraced 50% of its rally from August 1988, or to the $54 level. It could also reach the lows of July-August of 1999, or about $39.

In any event, if AOL starts accellerating to the downside on heavy volume, you cover, whenever that may occur. Similarly, if you short in here, any movement through $78 would mean the downward corrective wave is over for the time being.

The key is to keep your expectations modest and realize that the rest of the world thinks that AOL is a wonderful stock and will go up forever.

Given the plethora of weak stocks to pick from, the smart thing to do is to sell on any rallies rather than to chase them much beyond the beginning of wave 3.

EBAY presents the same dillema. It has already fallen quite a ways, but is breaking down below the $130 resistance level and is likely to carry all the way to the August lows around $86. However, you must have the psychology in place to protect yourself against a snap-back rally. The weekly chart for EBAY is worse than that of AOL. The Nov. high failed to reach the April high. Thus, on a longer timetable, wave 1 down was from the April highs, wave 2 up began in August and is a classic three wave corrective structure to the upside, failing to best the old highs. We are in the largest and meanest wave 3 down, and probably at a relatively early stage. Nevertheless, the short term snapback rallies can be scary in these stocks, so you must be ready for them.

Good luck and may you all prosper in the new year!

Ygg-

01/03/00 ADDENDUM - Well, sure enough, I write a post about the dangers of chasing falling e.tail stocks and AMZN rallys 17.41% while EBAY rallies 12.83%. AMZN has now retraced about 38% of its December drop measured from the lows of this morning, while EBAY has nearly retraced that amount. Actually, these snap-back rallies in falling stocks are manna from heaven, because they give you a lower risk entry point for shorting the stock. The fibonaci retracement numbers for AMZN are 90 (38.12%) and 95 (50%). AMZN closed at 89.375. For EBAY, the numbers are $142 and $150. EBAY closed at $141.25. Given the power of the internet mania today, I expect the recovery rallies in these stocks to carry for a few more days. I will pay more attention to the hourly chart formations, looking for an end to a three wave upward corrective structure, than for the Fibonacci retracements. The fibonacci numbers influence only the urgency of that search.

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