Larry,
I'm contemplating shorting a couple of individual stocks and I would like to run my reasoning by you or anybody else who might have an opinion. The 2 stocks are sohu & sina. Both appear to be in downward trends since about Jan. Both had a nice rally from an oversold level and have headed down again. Sina especially looks like it formed a head and shoulders pattern (admittedly a very weak left shoulder) and the right shoulder broke through support today fairly decisively. Both appear to be bucking the upward trend in the Nasdaq. Neither stock is oversold and volume has been much heavier on down days. The fundamental situation in China is for an economic slowdown. Both stocks have fairly high P/Es and both have heavy insider selling. I am planning to short both stocks in the morning. Do you think my reasoning is sound? Also any suggestions on an exit both if the trade goes against me and if it is profitable.

Thanks,
Jim

i know nothing about these companies but if they're stocks outta china - SHORT 'em!! short the whole country! i know it'll come back someday - but for now, short!

(i told you it was worthless... )

-ja

hey! guess what! the fed raised interest rates. did anybody notice?

-ja

Jim,

I agree on both stocks for all the reasons you mentioned. Also, the short interest is not bad for either stock, which means that the short side is not overly crowded. But the fact that you, Joe, and I all agree is probably a bullish factor rather than a bearish one.

I’ve been trading SINA for several months now. It’s one of my favorites because it really moves and it’s under the radar of Wall Street. These stocks are just not widely covered.

The only thing that would make me a little cautious about SINA is the downside volume was very heavy yesterday which could be a sign of capitulation. In other words, it’s possible that everyone who wants to sell for right now may have sold yesterday. But there is no question that both stocks are under heavy distribution and that’s bearish.

As for exit points, it depends on if you’re looking for a trade or you want to be in it awhile. For a short-term trade, I have found both stocks respond well to the daily Parabolic SAR. SOHU hasn’t quite signaled a sell with SAR yet, but it’s close. If it’s for something longer term, SINA’s 200-day moving average looks like a good reference point for a stop. With SOHU, I don’t see much resistance until around 25.

As for targets, if you’re not using a trailing stop, the May lows look like the closest support.

Larry

Jim,

Nice call! You have been officially been appointed the "Smart Money Report Success Forum Chinese Internet Stock Guru." Kind of a catchy title, don't you think?

Larry

Larry,
Thanks for the kind words. I guess I got lucky on that one. My question now is that both stocks are starting to get oversold and Sina gapped down pretty big today. I'm still pretty new at this, in your experience is the edge that Sina will fill the gap immediately? Should I just take my profit and be happy. I feel like Sohu may have a ways to go yet since it didn't gap down and volume wasn't exceptionally heavy. Tommorows futures however, are looking weak and if the markets start to sell off I think they may take both stocks even lower especially since neither has closed below their previous low yet. Thanks for all your help.
Jim

throw a stop/loss order (a buy stop) at you breakeven point and just let it ride!!!

-ja

Jim,

Ah, the age old question of when to get out. That’s the toughest one of all. All I can do is tell you what I would do personally with the disclaimer that there is no one right way and I don’t have any evidence that my way is any better than some other experienced trader -- like Joe -- who may have an entirely different view.

I view short sales differently from long purchases. First of all, there is the obvious difference that a short position has a limited profit potential of 100%. After all, SINA and SOHU can’t go any lower than zero. Whereas with a long position, the stock can advance several hundred percent or more.

Also, as I’ve discussed before, the market goes down differently than it goes up. When the market is declining it typically does so faster and with more volatility than when it advances. And it is more prone to very sharp reactionary counter moves to the upside. Furthermore, when it gets tired of going down it can turn on a dime.

So I’m a little quicker to take profits with shorts than I am with longs. I agree that SINA seems more likely to be close to a temporary bottom than SOHU. Yesterday, SINA traded slightly below its May low and closed above it -- a possible 2B reversal to the upside. And, you’re right, it did so on very heavy volume -- a possible sign of capitulation. Although it also declined on a heavy volume on June 30, and that sure didn’t stop it from going down further.

SOHU looks like it has another dollar or so left in it before it finds possible support at its May low. I would be less inclined to take profits on it.

So to answer your question, if it were me, I would take profits on SINA and use a trailing stop on SOHU. And I would look to short SINA again on a rally.

Larry

jim, how did you decide to play it? quick profits, stop/loss, something else? just curious.

-ja

Joe,
I decided to put a stop where sina opened on Wed. If it closes above that I will buy. So far it looks like its having trouble mounting any kind of rally. I also feel like the markets are probably headed down. Seems like the big money knew there were going to be a lot of warnings and consequently the sell off started last week. I don't think either stock is going to be able to make much headway if the markets in general are heading down. Thats my reasoning anyway.

Jim

sounds smart to me.



-ja

Larry,
Ebay, Amzn & Yhoo all seem to be breaking down. Amzn is in about the same position as Sina and Sohu, headed down all year, just coming off a nice rally but starting to break down again. All of them are way overvalued. All with heavy insider selling. Looks like they were all bid up to unsustainable levels by the momentum traders just like in 2000. If the chinese internets are starting to fall can the US internets be far behind? I feel pretty confident about shorting Amzn. Do you think Ebay and Yhoo are good short canidates also?
Thanks for all your help I'm learning a lot from your site.

Jim

Jim,

I heard an analyst once say that Amazon might be the most overvalued stock of all. I wouldn’t be surprised if that’s right. I’m not as comfortable being short eBay because it’s such a great business. But it is probably overpriced as well. I’m pretty comfortable being short Yahoo.

But I personally would wait for some kind of a bounce to short any of them. Amazon closed below its lower Bollinger Band and all three look oversold to me on a short term basis. I would wait for at least one or two up days and, ideally, I would like to see them close the gap left on Thursday.

Larry

Larry,
Well I went ahead and followed your advice and shorted Yahoo and Amazon and I left Ebay alone. All three look like they are going to break through support today on their head and shoulder patterns and wouldn't you know it the biggest move was by Ebay of course Thanks for the advice though without your input I probably wouldn't have placed the shorts.

Jim

Larry,
Well so far the shorts on AMZN & YHOO have worked out pretty good (I went ahead and shorted Ebay yesterday evening after the late rally). My next question is regarding FRE. It is starting to come off an extremely oversold level, the next support looks to be around $58.00. I don't know much about the fundamentals though. Could you or anyone else who might know tell me a little about what the company does and if lower or higher interest rates would effect it.

Thanks,
Jim

Jim,

Basically, Freddie Mac (FRE) buys mortgages from lenders and bundles them into securities that are in turn sold to investors. The company is chartered by Congress. The idea is that FRE is supposed to stabilize the mortgage market.

Since Freddie, like Fannie Mae (FNM), are government sponsored enterprises, they get all sorts of government perks. However, both Freddie and Fannie are under scrutiny for questionable accounting practices. And I think both are disasters waiting to happen.

Both stocks have stubbornly held up longer than I thought they would. But I think that they will eventually crack. I know that Market Wizard, Jim Rogers, thinks that FNM is a $5 stock.

Yes, both FRE and FNM are sensitive to interest rate changes. But I think the big money will be made when their accounting practices are finally unwoven and it is discovered that the emperor has no clothes.

Larry