Making Money On The Way Down

Futures look awful for tomorrow at roughly a half a percentage point down across all major indexes, along with several bearish charts that I believe can yield some nice profit in the coming week or more. Since I think it is going to be fairly difficult to make money going long on stocks tomorrow and in the near future, short selling should be considered, since it allows traders to make money when the overall market or just a single stock is heading down.

Short selling a stock means borrowing shares from your broker and selling them on the market at the current market price. You get to pocket that money right then and there, but you owe your broker the number of shares you borrowed. Short selling a stock would imply that you expect the price of a given stock to go down. When you feel the time is right to cover your shorted shares, you buy the shares back from the market in order to give them back to your broker (since you owe your broker the shares). In order to make money off this transaction, you had better predicted correctly that the stock price went down, because when you buy the shares back, if they are at a lower price, you essentially sold something for higher than what you bought it for. Thus, you pocket the difference. If the stock price went up, however, you lose money because you sold those shares to the market at a lower price than what you have to buy them back for.

Tonight's theme is the financial stocks and remember that shorting is usually a short-term position and should be monitored closely for any volume, price, or pattern reversals. On to the goodies:


Washington Mutual (WM) is one of the largest banks in the USA and one of the largest stock price losers. The mortgage crisis has caused this stock to depreciate roughly 69% over the past 6 months. Further trouble in the mortgage market with housing sales dropping and more foreclosures on the horizon will likely cause WM take further hits. Recently WM announced more write-downs from its mortgage division, causing the stock to take a sharp fall. The housing and mortgage markets are not looking to get better any time soon and further write-downs by lenders and banks affected by defaults are likely to continue.


Technical indicators for WM:

• Trading below 50 and 200-day moving averages: bearish for a while now
• Creating successive trading channels lower than another, signaling that the stock doesn't have enough buying support to stay at a price level or break above it.
  
• Recently broke below a trading channel support line at around $17 on very heavy volume, signifying further lows to come in the near future.
  
• MACD is looking to make a bearish cross-over, signaling a possible down trend as well.
• RSI is trending lower and might see the over-sold range soon if the market conditions continue to be bad.

• The RSI has recently taken a bearish dive (again) into the distribution area of 40-ish.
• The stock is in a trading channel that is showing a down swing movement with 2 distribution days already racked up and the possibility of more down days soon.
• MACD is heading towards a possible bearish cross-over.
• There is possibility of a rebound of the stock off the lower trend channel boundary, this is also where MACD should bounce back up if it happens, without crossing over; however, the market looks grim in the near future and this stock most likely will be dragged down with it, breaking through that lower trading boundary and seeing lower lows within a week.

• The stock had crossed below its 50-day moving average back in mid-October, signaling a bearish trend, which is evident.
• The stock is in a trading channel at the moment but recently met heavy resistance half-way up in a partial retrace (click here to learn more about these), which ensued in 4 days of moderate-to-heavy distribution.
• The RSI is pretty low in the distribution (selling) area and could see the oversold area with the grim market outlook in the short term.
• MACD is poised to make a bearish cross-over, which would send the stock below its current lower boundary in the trading channel, triggering more selling to lower prices for this stock.

• The stock has been making successive trading channels that break down into lower ones (indicated by horizontal trend lines).
• The stock is trading below its 200 and 50 day moving averages, signifying a bearish trend. The 50-day moving average crossed below the 200-day moving average back in mid-November, which also shows big weakness in the short to mid-term, and perhaps a prolonged bearish outlook on WFC altogether.
• The RSI is taking a down-turn in most recent days.
• The MACD has made a bearish crossover in the past several trading days, signifying a down trend, which is also supported by 4 consecutive moderate distribution days for the stock.
• According to the above indicators and the condition of the economy and the mortgage market, WFC is set to go lower from here and most likely break through the lower support trend line I have drawn.

• The 50-day moving average had crossed over the 200-day MA back in the beginning of November, signifying a bearish trend.
• The stock tried to break out of its current trading channel recently, but with no luck as it met resistance from the declining 50-day MA. Due to the resistance it has suffered from 4 moderately heavy distribution days, plummeting the stock towards the lower boundary.
• The MACD is showing a possible bearish cross-over, but tomorrow would need to confirm the cross-over since it still has a chance of bouncing back up.
• The RSI is starting to take a more aggressive sloped-dive into the 40-ish area.