Heading into this week, the stock market is hitting overbought
levels after the S&P 500 added around 2.23% during the
holiday-shortened trading week. The SPDR S&P 500 ETF (NYSE:
) currently has a Relative Strength Index reading of 71.54, which
is considered "overbought." While hardly a perfect indicator, RSI
readings over 70 often suggest that a market could be heading for a
correction as traders and investors may look to lock-in
The rally in equities has also catalyzed a significant move
lower in the CBOE Volatility Index, or VIX, which is sitting near
year-to-date lows. On Thursday, the VIX opened at around 17.30, and
by Friday's close it had plunged all the way down to 14.38.
Oftentimes, the VIX can be a contrary market indicator used to
identify extremes in sentiment and price action. Professional
traders will frequently use extreme readings in the VIX to put on
positions in the opposite direction of the prevailing trend.
An extremely high VIX reading normally corresponds with
pervasive market fear and a deep correction. Frequently, these
types of wash outs make excellent buying opportunities. Conversely,
when the VIX has traded below 15 in recent years it has been a sign
of complacency and was often followed by a pullback. The logic
behind this is simple. Stocks are like rubber bands -- if they get
stretched too far in either direction, the likelihood of a sharp
retracement goes up correspondingly. This has been the case since
the dawn of markets.
Given the technical outlook for the broader market, traders may
want look for some stocks ripe to be shorted.
Here are six stocks that could be setting up to fall this week.
All of these names are overbought, with RSI readings above 70, and
have at least 20 percent of their floats sold short, suggesting
that savvy traders are betting on price declines. These six names
also traded at least twice their average volume on Friday, which
could be a sign of a near-term top driven by institutional
) Shares of this natural and organic food company exploded through
trendline resistance on Tuesday and have continued to run higher.
Annie's only went public on the NYSE back in May and does not have
much of a trading history, but the stock is now sitting at new
all-time highs. The chart pattern suggests that BNNY may be just as
likely to be a long breakout candidate as a short, but it is
technically overbought with a RSI reading over 70 and a short
interest of 47 percent.
While the extremely high short interest suggests that
sophisticated Wall Street investors are betting on this stock to
fall, it could also trigger an even bigger short-squeeze in the
name. Given the uncertain outlook in Annie's, and the potential
that the stock could squeeze higher, bearish traders may want to
use put options to gain short exposure, or wait for the stock to
show some weakness before jumping into the equity on the short
side. In any event, this is a stock that has a high likelihood of
being active again next week.
) - This company is focused on providing total water solutions for
shale or unconventional oil and gas exploration. Heckmann has a
market cap of just over $617 million, making it a small-cap play.
On Tuesday, the company announced that it is merging with
privately-held Power Fuels, an environmental company in the Bakken
Shale area of North Dakota. The news sent HEK up 40 percent on the
day, and the stock continued to rally throughout the week. Over the
last 5 days, HEK has climbed nearly 52 percent. The momentum
petered out on Friday, however, and the stock pulled back by around
Prior to the merger news, this stock had been in a deep
downtrend. In fact, HEK is still down around 39 percent in 2012
despite last week's huge rally. The stock currently has a RSI
reading of 77.58 and a short interest of just under 21 percent. It
may be a good candidate to retrace some of its recent gains next
week. The 200-day moving average in HEK is sitting around 6.69
percent above current prices. A good risk/reward setup might be to
short the stock with a buy-stop above the 200-day moving average.
In particular, this trade might be attractive if HEK gaps higher to
open the week, making it even more overbought and closer to
overhead resistance at the 200-day.
Lululemon Athletica (NASDAQ:
) - This company reported its fiscal second-quarter earnings prior
to the opening bell on Friday. Lululemon beat analysts' estimates
and raised its full-year earnings guidance, sending shares up 12.45
percent on the day. The stock closed on its highs of the session,
and the strong earnings results could carry momentum over into next
week. The stock has broken sharply higher over the last month,
climbing more than 32 percent. Overall, LULU looks like a risky
short candidate, but after Friday's big move the short-term chart
is starting to look parabolic and the name continues to draw
Nearly 27 percent of LULU's float is sold short, and the stock
has an extremely high RSI reading of 81.68. An ideal area to
attempt to short LULU may be at the $80.00 level, which was the
stock's last swing high from early May, and is also near an
all-time high level in the name. A buy-stop could be placed above
the all-time highs in LULU at $81.09 to protect capital in the case
of a further breakout.
) - OfficeMax shares have staged an extremely powerful rally
throughout August and into the early part of September. Over the
last 3 months, the stock has surged more than 48 percent, and over
the last month the stock has climbed 27 percent. On Wednesday, the
company reiterated its full-year earnings view, and this led to a
continued rally on Thursday and Friday. Shares are now trading at a
new 52-week high and on a technical basis, the stock is clearly
While a pullback at some point seems inevitable, this is
certainly a risky name to short outright, and put options may offer
a safer way to gain exposure to a correction in OMX. Certainly,
Wall Street investors are expecting this stock to fall, as more
than 21 percent of OMX's float has been sold short. Furthermore,
the stock now has an extremely high RSI reading of nearly 80.
Traders who are interested in playing OMX from the short side, may
want to wait for the stock to show some weakness before taking a
Radian Group (NYSE:
) - This small-cap mortgage insurer is a notoriously volatile
stock, and in recent weeks, RDN has been on a large upswing. On
Thursday, the stock climbed around 13 percent after the company
released data for primary mortgage insurance delinquencies for
August. On Friday, the rally continued with RDN adding another 7
percent. After the sharp two day move, the stock is now trading
well above its 20, 50, and 200-day moving averages and is closing
in on new 52-week highs.
Radian is now sporting a RSI reading of 76.55, indicating that
it may be susceptible to a near-term pullback. Furthermore, more
than 23 percent of the stock's float is sold short as traders are
likely using the stock to make bearish bets on the housing market.
An attractive area to enter a short in the stock might be at $4.50.
On Friday, RDN hit a high of $4.49 before pulling back and closing
at $4.33. Traders who short the name will likely want to cover
their positions if the stock breaks out to new 52-week highs which
come into play above $4.68.
Westlake Chemical (NYSE:
) - This stock broke out above trendline resistance on Thursday and
is now sitting near new 52-week highs. On Friday, however, the
breakout was not confirmed as WLK shares fell very slightly on the
session. The stock attracted heavy volume, however, without moving
up, and this could be a sign of a near-term top in the name.
Westlake has been very strong in 2012, so bearish traders should
certainly exercise caution and use buy-stops. Year-to-date, shares
have surged more than 77 percent.
The combination of a very high RSI reading, which is just below
75, and a short interest of nearly 24 percent could suggest that
WLK might be vulnerable to a near-term pullback. The stock is
trading above all resistance levels and its 20, 50 and 200-day
moving averages, however, so the longer-term trend in the name is
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