Looking for a walk on the short side? Check out Costco (COST). (October 09, 2018)
COST STMP
Let’s talk about Costco ( NASDAQ: COST ). The reason is because the time, at least for me, that has worked best for shorting stocks is not when they first plunge down here like we saw a couple days ago. A lot of retail traders look to short stocks here. Because they think, well okay, this is a trendline break. I will short it here and cover at 205.00 at the 200-day moving average. Or they just kind of get unicorns dancing in their dreams, and think the stock is just going to keep going down.
The bottom line is, what happens in a situation like this is, some folks that are short will cover in the same way that a breakout to the upside is going to prompt some profit taking on that. People that were long the stock, they see the big move up, they are going to sell into that and that kind of halts the uptrend. Here the stock gapped down and kept going and you are going to ultimately, at some point, whether it is here or down here, by the way, we know where it is, but it could be here or down here.
At some point shorts are going to cover and say, “You know what? I am going to take my money and close out this really nice short.” And at the same time dip buyers, who are waiting, couldn’t buy up here, they see the stock is finally down at a price that they can afford to buy, they can reason that it is a good time to buy, they are going to go ahead and start taking the stock; that is what we saw. You even see this kind of reversal in a stock like Tesla ( NASDAQ: TSLA ) that just had every reason to go lower and ultimately, guess what? It goes a little higher. That’s what happens, value buyers come in, they buy the stock, short sellers close out their profitable positions and then you have got a stock that is in this situation right now.
So the deal is, if the stock does not rebound strong, right up here, then what this shows you, what it reveals is that there is a lot of selling pressure still to be had. Because anybody who is buying this dip now, they saw it at 220.00. Oh my gosh, I’ve got to load up on this, all they are having to pay is up $4.00 and that’s it. In other words, there is plenty of supply for anybody who wants to buy Costco ( NASDAQ: COST ). I say, after a trend break like this a lot of the guys that were going to buy this stock have already bought the stock, now they are selling.
So the idea of selling short is that you are not in the stock one way or the other. You see the stock breakdown and you do not short, you watch. You wait to see if, you want to see the stock return, try to regain it’s former glory here, up above the 50 and if it doesn’t; boom! That’s when you short the stock. You short the stock because your thesis is, that there is more supply on any kind of rebound from those who got caught. They didn’t sell up here; they are wishing they could. So as the stock rebounds it is like, well I know I can’t get all my money back but I’ll get as much of it as I can, and then the stock starts rolling over.
That is what I am looking for, a failure actually below the 50-day moving average. If we get that then the cool thing is you’ve got your risk well defined because you can set a buy stop right up here above, say, $230.00. And the only way that stop is going to be hit is if the stock actually recovers above its 50-day moving average. Hopefully, you get a little more upside even tomorrow, though, the stock does look like it has kind of failed. You short the stock and then look for 5, 10, 15 points, something like that.
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