I explained in a recent article that when you set out to short a stock, you need to act like the typical school yard bully…
Remember… A bully doesn’t pick on the strong, confident kids in class. A bully seeks out the weakest of the weak and picks on them over and over again.
Well, that’s exactly what we’ve been doing over in my premium Alpha Stocks trading service…
After gaining a whopping 790% during the stay-at-home boom in 2020, our latest short target has fallen as much as 82% from its recent all-time high.
And it hasn’t been able to meaningfully close above its 50-day moving average in almost an entire year.
Today, I’ll tell you a little more about why this stock is so attractive for a short trade and how I’m playing it for further downside gains…
Seek Out The Weak
As regular readers know, a moving average (MA) is one of my favorite stock indicators. It’s a dynamic line that plots the average price of a security over a given time period.
Traders will usually use 50-day and 200-day MAs, but they can be set to pretty much any length of time.
The reason they are useful is that they help to smooth out the day-to-day volatility and show the general trend of a stock or index.
Typically, a stock that is moving higher in an uptrend will trade above its major MAs, and both the price and the MAs will rise together.
On the other hand, a stock that is moving lower in a downtrend will trade below its major MAs, and both the price and the MAs will fall together.
This was my first clue that Pinterest, Inc. (PINS) had fallen into an identifiable downtrend…
As mentioned, you can see on the left-hand side of the daily chart above that PINS rode its 50-day MA (red line) all the way up to its all-time high in early 2021.
Price action then started to flatten out and move sideways, creating a rounding top where large investors were clearly cashing in on their gains.
Notice how the 50-day got closer and closer to the 200-day (blue line) MA as it flattened out and eventually crossed below it.
This occurred just after the stock experienced a big 18% gap-down after a bad earnings report, which I’ve circled on the chart above.
Price trended lower for a few months but then came back up to test its 200-day MA as resistance in October 2021, marked by the second circle on the chart.
That test almost immediately failed, and PINS confirmed its downtrend as it traded below both of its MAs again.
The Right Place to Short
Now, you can see that price continued to fall into 2022, but we did not take a position until late last month.
Let me explain…
As you can see, March of 2022 was the first time that PINS reconnected with its 50-day MA since the big gap-down on earnings.
Price got rejected by the 50-day after a weak attempt to push above it, and it then got rejected two more times at that level over the following few months.
So, when price tested the 50-day for the fourth time, I sent an alert to Alpha Stocks subscribers to go short.
Here’s an excerpt from that alert…
“Pinterest has been in a downtrend for over a year. The stock has found resistance at the 50-day moving average for several months and is now testing the level once more.
We can short the stock here with a low-risk stop. If the level continues to hold, we will be looking for PINS to fail here and make new lows.
The lows are roughly 21% below the current price. So a 7% stop loss will give us a 1:3 risk/reward ratio.”
We recorded an entry price of $20.85 on June 24 and, as expected, PINS got rejected again. In a week’s time, we were sitting on a gain of nearly 12% on our short idea.
So, on June 30, I sent another alert to subscribers instructing them to take profits on half of the position and lower the stop to breakeven levels.
And just like that, we recorded an exit price on the first half of $18.41 for a gain of 11.7% in only six days!
Be The Bully
Now, I don’t condone bullying when there are people and feelings involved…
But this is the nature of trading market, and I’m totally in favor of bullying weak stocks like PINS into submission whenever possible.
We’ll let the rest of our short position ride for now, as I expect PINS will trade to new lows in the near term.
But we could easily come back to this stock over and over again if it keeps bumping up against clear resistance as it has been doing for a few months.
Chances are it’s not going to put up much of a fight…
And that’s why weak stocks like PINS always make for the best short candidates.
Join Today’s Live Session
Now, if you want to receive an alert when it’s time to close the second half of this position, you’ll need to be a member of my premium Alpha Stocks trading service.
We have plenty of long ideas for the right stocks… We recently generated a gain of 21.3% in just 15 days in Permian Basin Royalty Trust (PBT) as that stock broke out of its range.
And last Wednesday, we closed another winner in ProPhase Labs, Inc. (PRPH) for a two-day gain of 5.8%.
But as you can tell, we’re also not afraid to go short… Beyond the PINS trade, we recently recorded a 21.6% gain on the downside in only eight days as Pegasystems Inc. (PEGA) stock plunged…
Of course, we also get together every Monday for an hour-long live session so that subscribers can ask questions and get guidance about our trades.
If you’re ready to see what you could be missing out on, I’m holding a special session this afternoon in which I’ll discuss my strategy in more detail…
Embrace the surge,
Editor, Stock Surge Daily