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Technical Short Ideas in a Strong Bull Market

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I built my watchlist of stocks to target for a short position a little under 2 months ago. Last weekend, I refined my criteria further. I want to short stocks that:

  1. have declining relative strength to the QQQ ETF

  2. have witnessed a drop in volume

  3. show a decline in on-balance volume, a technical indicator which adds volume on up days and subtracts volume on down days to present a cumulative measure. OBV goes negative in extremely oversold conditions/ prolonged downtrends. OBV is positive but declining when the uptrend has weakened/ positive momentum has decreased

  4. exhibit a topping pattern and fading momentum

I identified 4 short sale candidates using this criteria: Marvell Technology (MRVL), Autodesk (ADSK), Doordash (DASH) and ZScaler (ZS). I went short all but ZS today. ZS has high insider ownership (38.57%) and high institutional ownership (50.52%). That increases the likelihood of a short squeeze - I want to avoid that situation.

There's an old joke that new technical traders see a head & shoulders pattern everywhere. That's probably true. But it does catch the eye.

High volume gap down and the OBV is now negative. Volumes spike and ebb so the drop in volume isn't as obvious but this is a short based on criteria 1,3 and 4. I expect 2 to follow.

I'm late to this trade. So the question I had to ask myself was: how much lower can ADSK go?

This is a $46 bn market cap company with $5.3 bn in sales and less than 20% operating margin. 10x sales multiple is getting to be very common among tech stocks now, but clearly, investors in ADSK are already heading for the exit. Multiple expansion doesn't seem likely at least for now. And I'm reminded of the Scott McNealy (CEO of Sun Microsystems) quote during the dot com bubble, where he chastised investors who chased his company's stock.

"At 10 times revenues, to give you a 10-year payback, I have to pay you 100% of revenues for 10 straight years in dividends. That assumes I can get that by my shareholders. That assumes I have zero cost of goods sold, which is very hard for a computer company. That assumes zero expenses, which is really hard with 39,000 employees. That assumes I pay no taxes, which is very hard. And that assumes you pay no taxes on your dividends, which is kind of illegal. And that assumes with zero R&D for the next 10 years, I can maintain the current revenue run rate. Now, having done that, would any of you like to buy my stock at $64? Do you realize how ridiculous those basic assumptions are? You don’t need any transparency. You don’t need any footnotes. What were you thinking?"

I am worried about being late. But not so much as to not take the trade.

I wouldn't short an obvious technical breakdown in an overvalued stock like Mobileye (MBLY), which is priced at 10x sales, because at this stage I'll be letting myself in for a lot of chop and not much gain. That just ties up capital without giving me an adequate return.

The price moves are very erratic, making it one to avoid.

Even though the indices are holding up well, it is possible to find pockets of weakness. It takes a lot of effort though. I like having technical shorts in my book to balance out the longs, especially since I'm running at 216% gross exposure (116%/100%).

Good Trading!


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