A couple days ago, we took a short trade in Pegasystems Inc. (PEGA) in my Alpha Stocks service.
We have a profit of about 5% so far, and the stock continues to fall.
Take a look at the chart…
As you can see, PEGA is in a textbook downtrend.
Six months of lower lows and lower highs make this an absolute dog and ripe for selling short.
I’ve drawn a yellow trend line on the chart. The goal is to find the point where the stock tends to fail on short-term upside rallies.
This is where you want to sell short.
Traders had clean entries in December and February, and we just got another one this week.
Every time PEGA approaches the yellow downtrend line, which is also right near the red 50-day moving average, the stock fails and proceeds lower.
But there’s another reason we sold it short and why stocks like PEGA are the best ones to play on the downside.
When Growth Goes Wrong
Pegasystems is a growth stock. It was a top performer in 2020 when it soared 150% in less than a year.
These growth stocks tend to have impressive numbers – big earnings growth, big sales growth, high relative strength, etc.
But when they fall out of favor, these stocks get slaughtered.
A stock that can climb several hundred percentage points in a year can also fall by 50%-80% in a short time.
And they often do…
Once earnings growth slows or the outlook dims, institutional investors head for the exits.
They dump the stock en masse.
And this is what causes such a dramatic drop in the share price.
If you’re looking for stocks to sell short, watch the ones that made the biggest moves up over the last one or two years.
As soon as they break the 200-day moving average, it’s time to start looking for a short entry.
As I said above, this PEGA is currently a short idea in my Alpha Stocks service.
Typically, we like to go long and find stocks delivering “alpha” above and beyond the returns of the broader market.
But until the market finds a real bottom, we’ve started to include some specific short ideas.
Embrace the surge,
Editor, Stock Surge Daily