Recently, I reminded you about the old Wall Street adage, “Don’t fight the Fed.”
Well, with the Federal Reserve on the warpath to defeat inflation with tighter monetary policy, fighting the Fed would mean going long and buying stocks.
So, we did just the opposite…
In my premium trading service, Alpha Stocks, we decided to short – or bet against – a particularly weak stock in a very methodical way.
As I explained to my subscribers, every time the stock hit a certain point on its chart, the research showed that a downturn followed.
That stock was Pegasystems Inc. (PEGA), and with yesterday’s massive drop, Alpha Stocks subscribers just scored a major win…
Short Selling Basics
First, let me cover the basics of shorting a stock because I know it might be new to some of my readers.
The practice of betting against a stock is known as “shorting” a stock. When you short a stock, you are betting against the company’s success.
And doing so can be extremely rewarding for investors with the right guidance, like my Alpha Stocks subscribers.
It may seem complicated, but shorting stocks is no riskier than buying stocks.
In fact, I could make a case for it being far less risky.
Stocks tend to take the stairs up and the elevator down. In other words, they fall much faster than they rise.
And if you can get your timing down, you could see quick profits from shorting a stock versus betting on their potential success.
The Short Setup
Now, that is exactly what transpired in shares of Pegasystems Inc. (PEGA) this week.
At the time of my alert to Alpha Stocks subscribers, Pegasystems was in a textbook downtrend.
The stock was stair-stepping its way lower with a series of lower lows and lower highs.
It then spiked on better-than-expected earnings last week to bring the price up to its 50-day moving average, as you can see in the chart below.
This was a good backstop to short against, as the 50-day moving average (red line) had been acting as resistance for months.
Every time PEGA stock got near this line, it rolled over and headed lower again.
So, I recommended that subscribers sell PEGA stock short, and we recorded a short entry price of $74.19 on May 2.
By May 6, the stock had already started to drop, so I recommended closing the first half of the position.
We recorded an exit price of $67.90 for a gain of 8.5% on the first half.
PEGA Takes the Elevator Down
As I said above, stocks tend to take the stairs up and the elevator down. In other words, they fall much faster than they rise.
Well, when news broke yesterday that a jury ordered the company to pay over $2 billion in damages to Appian Corporation (APPN) for stealing trade secrets, PEGA stock plummeted.
Take a look…
PEGA plunged from Monday’s closing price of $65.93 to a low on Tuesday of $36.56 — a drop of over 44%!
As a result, I alerted Alpha Stocks subscribers to close the second half of the short position, and we recorded an exit price of $48.43 for a gain of 34.7% on the second half of the trade.
We didn’t catch the exact low… But we walked away from this eight-day trade with a combined return on our short position of 21.6%.
And subscribers who used the put option alternative — another way to bet against a stock — scored even greater triple-digit gains.
That’s absolutely massive in a market that’s been delivering almost nothing but losses for long investors this year.
Join Me for a Special Alpha Stocks Session
If you’ve been struggling in this wild stock market environment, with the major indexes down double-digits and many of last year’s leading stocks down over 50%, consider checking out my Alpha Stocks trading service.
We have plenty of long ideas for the right stocks, but we’re also not afraid to go short. We short stocks and we also provide option alternatives if that’s more of your style.
And we get together every Monday for an hour-long live session so that subscribers can ask questions and get guidance about our trades.
Embrace the surge,
Editor, Stock Surge Daily