Zeev's Turnips Patch-No Politics (ZEEV)

[marketmaven]

Your moniker is tight fitting, BPPAD

To Find A Good Stock To Short, Look For A Long Series Of Bases
BY DAVID SAITO-CHUNG
http://www.investors.com/editorial/editorialcontent.asp?secid=1100&status=article&show=1&...

INVESTOR'S BUSINESS DAILY

"The bigger they are, the harder they fall." Remember this saying when you look for a stock to sell short. The stocks featured in "How to Make Money Selling Stocks Short" scored huge gains before they topped. You can raise the chances of making a gain by shorting a stock that has plenty of room to fall.

Search for those that have built base after base, running up after each of these resting periods. As noted in past Corner articles, a stock that has built four or more bases is more likely to stage a sharp decline.

Many readers have asked IBD: How do you count bases? It's not that hard, so long as you follow clear rules. First, start counting bases only when the stock has gone past $10 a share, either within the base or soon after the breakout.

Next, calculate the run-up from the stock's breakout point to its high before the stock declines. Is the gain 30%? If so, it's now forming a new base. Base-on-base patterns, generally speaking, count as one base. Why? The upper base usually forms after the stock rises 10%, 15% or 20% above its most recent pivot. Finally, keep in mind a cup base must see a decline of at least 12%.

Career Education (CECO) was a star of the early 2000s. The for-profit school chain broke out of its first base in January 1999, then rushed out of a second base in June 2000 1. Career traded just 50,000 shares a day on average. Yet earnings per share jumped 46%, 110% and 189%. Sales grew 51%, 55% and 51%.


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As the monthly chart shows, Career vaulted 121% in just four months of work. That more than meets the 30% minimum gain required before a new base can form.

Despite the bear market's tight grip, Career finished its third base and powered out to new highs again in February 2001 2. This time, the stock rallied 63%. As the market weakened a month before the 9-11 crisis in 2001, Career also took a break 3, setting up its fourth base.

The big run-up made Career a short-sale candidate. But a few superb stocks have such explosive growth that they go on to make five or six bases during their run.

That was the case of Career. The stock dipped again in the second half of 2002, producing a fifth-stage base 4. In March 2003, Career moved in sync with a big follow-through by the major market indexes, blasting out of a five-month cup-with-handle pattern and running up 133% 5.

From October 2003, the Hoffman Estates, Ill., firm corrected for a sixth time 6 since its initial rally nearly five years earlier. It was a sloppy base, but Career managed to gain 28%. Abiding by our rules, that wasn't enough to justify the sideways movement from April to June 2004 as a new base 7. In June, Career collapsed 33% 8 on questions of its graduation and enrollment rates. This sell-off turned out to be the head in an unorthodox head-and-shoulders pattern of weakness.

By then, liquidity was plentiful. Shares outstanding ballooned to 98 million. The average daily volume was nearly 1.9 million shares a day. Please see Page 184 of "Selling Stocks Short" for a weekly chart of a choice shorting pattern and the right spot to sell shares short.

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