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Short Sellers Beware

Russell 2000's minor reversal is the first indication that buyers are nibbling at some of the most oversold names


Stocks ended higher Wednesday despite the continuation of heavy selling in the formerly high-priced technology issues. But the session was volatile, with early gains resulting from the appearance of a peace overture from Russia disappearing in a flurry of selling after just 30 minutes of trading.

Following the early morning 125-point sell-off, the Dow industrials turned, and by noon had recaptured all of the losses plus another 35 points. Utility stocks continued their upward march with the Dow Jones Utility Average gaining 1.6% and expanding its gain for the year to 12.9%. Only the Nasdaq continued to be negatively impacted by heavy tech selling, losing 0.3%.

Some of the stocks that continued to knife lower were Twitter (TWTR), Facebook (FB), Tesla Motors (TSLA), Priceline (PCLN) and the iShares Nasdaq Biotechnology (IBB). But Electronic Arts (EA) jumped 21% after reporting quarterly earnings that demolished analysts’ forecasts and announcing a new $750 million stock buyback plan.

Fed Chair Janet Yellen offered a positive outlook for the economy and said the policy of low short-term interest rates would continue for the foreseeable future. She also said stocks, at 15.2 times expected 12-months earnings, “remain within historical norms.”

The 10-year Treasury note fell to 2.59% from 2.595%. And gold declined 1.5% to $1,288.60 a troy ounce.

At Wednesdays close, the Dow Jones Industrial Average rose 118 points to 16,519, the S&P 500 gained 10 points at 1,878, and the Nasdaq fell 13 points to 4,068. The NYSE traded 766 million shares on its primary market with total volume of 3.6 billion shares. The Nasdaq crossed 2.4 billion shares. On the Big Board, advancers outpaced decliners by 2-to-1, and on the Nasdaq, decliners led by 1.2-to-1.

Dow Chart
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Chart Key

The Dow industrials traded within a narrow range Wednesday bordered by its Bollinger Bands (not shown). However, for the second consecutive day, the lower band was penetrated by the intraday low of the index but closed higher, rendering back-to-back Collins-Bollinger Reversal (CBR) buy signals. The CBR is my proprietary internal indicator, and I don’t believe that this has ever happened before, especially after a CBR sell signal just prior to the two buys.

RUT Chart
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One day after penetrating its 200-day moving average, the Russell 2000 issued a minor CBR buy signal (minor because of low volume). But the fact that the index overcame early selling and closed on a slight plus is positive.

Conclusion: Bifurcation continues, but looking at the broad indices, it actually contracted slightly Wednesday. The minor reversal of the Russell 2000 is the first indication that buyers are starting to nibble at some of the most oversold high-tech and biotech names.

Thus, short sellers should be very careful to exercise discipline with their stop-loss orders. As my first boss said to me, “Your first loss will be your best loss.” What he meant was that it takes a loss to learn what you did wrong and not repeat it.

And one of the first trading errors many rookies make is to let a short position run against them as they freeze like a deer in the headlights. Always protect a short position with a stop-loss order since it has the capability of rendering an unlimited loss.

Today’s Trading Landscape

To see a list of the companies reporting earnings today, click here.

For a list of this week’s economic reports due out, click here.

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