Stocks to Short...When the Dust Settles Tickers in this article: SUNE, CMCM, WETF, MOMO Between August 20 and 25 the SPDR S&P 500 (SPY) covered a price range of $25.89; that's 12.4% of the August 19 $208.32 closing price. Moves of that size in such a short amount of time are extremely rare. It's a highly emotional event though, which can lead to emotional decisions. Active traders are easily lured into trades they wouldn't normally take. It's important to wait for trades that align with your strategy, even when emotions are running high and trading to the short side seems like easy money. Here are four stocks to consider shorting, but instead of selling them now, wait for a pullback to potential resistance--it's a higher probability, and likely lower risk, strategy.
SunEdison, Inc. (SUNE) 
The decline in SunEdison, Inc. (SUNE) began after peaking at $33.45 in July, well before the major indexes commenced their decline. Having fallen 39% in the last week, and with the markets selling off, it may seem like a great short trade. It could continue to decline, but slightly declining volume, despite the big recent sell-offs (down 17.99% on August 25), could indicate a short-term bottom. If the price pulls back, look for short trades in the $13 to $14 region. A rally above the $16.27 August 13 high indicates a deeper pullback, or even the start of a reversal; consider placing a stop loss above that high. If the downtrend continues, expect a move below the most recent low, currently $8.78.
Cheetah Mobile Inc. (CMCM) 
Cheetah Mobile Inc. (CMCM) broke below a range in late June, and is in a downtrend since. Drawing a trendline on the decline shows a potential short trade area near $22.50. August 18 marked the high of a consolidation at $24.86 in that region. Placing a stop loss above that level helps manage the risk on the short. If the downtrend continues after the pullback, a target is placed near the August 24 low of $15.10. There is support in that area going back to late 2014 and early 2015.
Wisdom Tree Investments, Inc. (WETF) 
Wisdom Tree Investments, Inc. (WETF) was in an uptrend since October, but has been one of the hardest hit stocks during the index meltdown, losing 24.67% in the last week. Between August 19 and 20 the price gapped lower, and was the starting point for the major sell-off which occurred over the following days. The gap is $23.65 to $23.26, and that's the current place to look for short trade. With the price closing at $18.57 on August 25, it may take a while to reach that level, or it may not reach it at all. That's the trade-off of waiting for a better price: it may not come. As more price action unfolds, another resistance level may form, providing an alternative short trade area. For now though, short sell below $24 with a stop loss above the August high of $26.23.
Momo Inc. (MOMO) 
Momo Inc. (MOMO) peaked at $19.89 in May and the trend is currently down. Before commencing the most recent wave lower (in late August) the stock had found support between $15.20 and $15.60. That old support level could now act as resistance. Look for shorts in that region, or slightly below, with a stop loss above $17. On August 24 the price hit a low of $10.71 that aligns with support from February to May. Therefore, taking profits on the short trade in the $11 to $10.80 area may be a better strategic play than hoping for a further fall.
The Bottom Line If the price pulls back to resistance, these stocks could provide good short trade candidates. Ideally don't short blindly at the resistance levels mentioned. Look for a sign of weakness as the price is pulling back. A signal to enter a short trade could be a bearish engulfing pattern in the resistance zone, or a consolidation that the price breaks lower from. Look for evidence to suggest the pullback is ending and the downtrend is resuming. Trends reverse and losing trades will occur; assess whether the profit potential is worth the risk and only risk a small portion of account capital on any single trade.
Refine Your Financial Vocabulary Sign up to receive our FREE Term of the Day newsletter. Gain a better understanding all things financial with technical and easy-to-understand explanations. Click here to begin developing your financial language with this daily newsletter. Disclosure - At the time of writing, the author did not own shares of any company mentioned in this article.
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