The Big Picture | Next Technical Confirmation: Stocks breaking Monday’s lows

Next Technical Confirmation: Stocks breaking Monday’s lows

Friday, December 01, 2006 | 02:36 PM

NOTE: This Market Commentary alert was originally emailed to subscribers at Ritholtz Research & Analytics on FRI 12/1/2006 2:33 PM;

This is posted here not as investing advice, but rather as an example of a trading call for potential subscribers. We expect to post future advisories in a similar manner -- after the call, but in the correct chronological location on the blog.

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Earlier this week, we noted that the Transports were telling us the time to look to short was growing closer.

Today, we got the 2nd piece of that puzzle: The Nasdaq, the Transports, and Dow Industrials have all broken below Mondays low points. (The S&P500 and the Russell 2000 have not).

This is first set of lower lows on major indices – on strong volume – is a 2nd significant signal.

As of now, this is enough confirmation for us to suggest a TRADING SHORT. We would not go hog wild here; There are not enough indicators to get aggressively short – but you can begin to take small short positions in specific names:

Indeed, on the possibility that something untoward could happen on Monday morning, we want to establish small trading shorts – position holders – right here.

Given how far and fast the Nasdaq 100 has risen, that’s likely the best index tyo use as a short. We are establishing a modest trading position – short the Nasdaq 100 (QQQQs) between 43.25-43.75, with 44.35 as a stop loss.

A more speculative short is the Dow Jones Real Estate Index (IYR). It is a collection of REITS that has run up nearly 10 points since early November and may be forming a double top. This is a more aggressive short suitable only for fast traders. Leg into shorts between 85-86; Use 86.35 as a tight stop.

Over the weekend, we will be running sector and individual company analyses looking for specific names and chart confirmations.

Depending upon what we find, we may swap the index shorts for specific names . . .

-Barry Ritholtz
December 1, 2006