Shorting: FCX And AMZN

FCX has enjoyed quite a rally off the recent low, especially since the Triple Breakout Through Triple Validated Resistance on June 28, where the short trade got busted. On a breakout like that, as we've discussed in the past, "buying begets buying." The Bulls buy the breakout and buy at various points along the way, and The Bears become unwilling buyers, being pressured to cover their losing short positions and any additional short positions that they put on during the rally, so the proverbial "everyone" is a buyer. The "short squeeze" helps to propels the stock higher in the rocket-like fashion that we've witnessed.

"Thou shalt not short a Triple Breakout Through Triple Validated Resistance."

The best time to short is (1) on a breakdown of support, (2) on a retest of broken support, looking for a failure, or (3) on a test of resistance. The reason for that is we will find out fairly quickly whether or not the trade is going to work, without taking much risk. The biggest risk in the trade would be holding the short overnight and having the stock gap up big the next morning.

Shorting an upside technical breakout because we don't think that the stock should be rallying is begging for trouble. Any given breakout or breakdown "could be" a fakeout, but we usually find that out fairly quickly, like the Bearish Wolfe Wave Double Fakeout/Breakout in April. "The Tell" that it was a fakeout came on April 11 (see comment on the upper left of the chart). If the stock breaks out and starts taking out some resistance (see the three horizontal red bars at the recent upside breakout, which represent horizontal resistance), it is unlikely that the breakout is a fakeout, and when short-term targets start getting MADE, which occurred early in this rally, it is VERY unlikely that the breakout is a fakeout.

If we're ever caught out of position short a stock on an upside technical breakdown, recognize the mistake and cover the position as quickly as possible. We especially don't want to compound the mistake by doubling down, tripling down, etc. because we're now overexposed in the trade (holding too many losing shares). While Ms. Market "might" be generous and let us out of the trade at our average price for a break even, she generally punishes us for naughty behavior, like shorting an upside technical breakout.

Rather than "fight the trend," it's better to wait for a shorting opportunity where our chance of success is greater, i.e. (1) on a technical breakdown, (2) on a retest of a technical breakdown, or (3) at resistance. The latter opportunity presented itself at 2:25PM yesterday afternoon.



(1) If, at Wednesday's close, I were FORCED to give an opinion about whether FCX would go up or down in yesterday's session, I would have said DOWN.

(2) If, at Wednesdays close, I were asked if I thought that FCX would rally to the top of the BIG Falling Wedge, I would have said, "Extremely doubtful that it would rally that much during the session, after the nice rally that it's already had."

(3) If, at Wednesday's close, I were asked if I thought I'd be shorting FCX any time on Thursday, I would have asked, "You're joking, right?"

Yesterday:

(1) FCX went up, not down as I would have guessed. WRONG.

(2) FCX rallied to the top of the BIG Falling Wedge, which I didn't think that it could do. WRONG.

(3) I ended up shorting the stock AT resistance, which I didn't think that I'd be doing because I thought that it was extremely doubtful that it would get there in yesterday's session. WRONG.

You see why I have no opinion about what a stock will or will not do next. You also see why I don't make predictions, and why I say that I try to FOLLOW Ms. Market as best I can. My opinions and predictions, if I had them or made them, usually would be WRONG, which is why I say:

"I can't possibly know what Ms. Market is going to do, but what I can know is what I'm going to do about it."

What I did about Ms. Market's unexpected (by me) rally to resistance was short it because we know that over time, we're favored to win more of those trades than lose them, and we're also favored when we structure the trade so that the reward if the trade works out is greater than the risk that we're taking, which in this case, was a mental stop of a twenty cent loss ($500) vs. a targeted gain of about forty cents ($1,000), for a 1:2 risk/reward. I'll take a 1:1 risk:reward if I really like the trade (or if I'm bored to death and wanna play...LOL), but a 1:2, 1:3, etc. risk/reward is much better.



I made a little more than I had planned, due to the fact that this H&S Top emerged, and broke down. The Right Shoulder is unorthodox because it is higher than the Left Shoulder, which it "shouldn't be," but as we've witnessed many times in the past, those often work out fine.

The breakdown put 55.40 IN PLAY. The low in FCX going into the close was 55.48 when time on the clock expired. I covered shortly before the close, not wanting to hold overnight. While the daily chart "looks like" FCX should sell off from validated resistance to fill the gap, you saw how good my opinions and predictions are (NOT!). The chart is bullish, and I didn't want to risk the possibility of staring into a Gap Up breakout through validated resistance in the morning.



Talk about a short squeeze...mercy! What a deceptive move that Falling Wedge was. It "looked like" the Bullish Inverse H&S breakout in late April was a bust, but "The Tell" that the chart still was bullish was the bounce higher off validated support at the bottom of the Falling Wedge, near the Bullish Inverse H&S neckline.

The rally that ensued from that point is a thing of beauty (but, merciless on the shorts). The 215.86 Bullish Inverse H&S target finally got MADE in yesterday's "lucky" 7-7-11 session ;)



Gain on the FCX short: $1,350