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Tax-loss bounce candidates

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Here's a strategy for short-term trading that some traders may want to take advantage of in the next week or so. We've all hear about "tax-loss selling" and how some stocks can be driven down as investors look to book losses on certain stocks to offset gains in others. This is "simply" a strategy that looks to take advantage of supply/demand characteristics over the very short term. It by now means an opportunity for readers to make big bets that a stock will bounce. What some traders like to do is take a portion of their trading dollars and spread some bets over a few stocks that may benefit from a "lack of selling in the New Year." Here's a stock that a trader may have traded back in December of 1998 to take advantage of a "tax loss bounce" in early January. Let's see if we can learn something from it, what worked, and look for other candidates with similar attributes.

PeopleSoft Inc. Chart - Daily interval - Sept. 1998 - Jan. 1999

1998 was a tough year for shares of PSFT, but traders that may have played the stock for a tax-loss bounce on December 31st of that year got a nice little pop in the stock as the new year began and tax-loss selling had subsided. The opening of trading on January 8th saw the stock "pop" to a high of $26.38. You didn't need to hold the stock to that level if you bought near the close on December 31st near $19. A move to $24 would have been gain enough to book some profits and get the New Year off on the right foot. By the end of January, PSFT was back at $19. Traders that trade the tax-loss selling "bounce" do just that. When they get the bounce, they're booking profits and moving on.

What was it about PSFT that made it bounce?

There could be any number of things that had PSFT bouncing more than some other stocks in January of 1999. Some things we might point to is the stock was close to it's 50-day MA (thin blue) and was trading slightly higher than its recent low in December. While this was a VERY short-term positive, it might have been enough to keep bears from providing supply (shorting) in early January. MACD had also been trending higher and was above the zero level. We might also say the stock had been basing for awhile. We're never SURE what makes for a good tax-loss selling rally in a stock, and that's exactly why traders want to have a few stocks on their "candidate" list to monitor. Here's a few that might fit the bill. Understand that this is only a strategy designed to take advantage of a short-term supply/demand imbalance. We like to stick to four-lettered stocks where the market-maker who knows all too well about tax loss selling might tend to "lighten up their offers" as they understand that there may be less sellers in the market come January 1st.

A list of Candidates and their charts

It has been a rough year for all of the stocks below and you'll note they seem to have a "technology" theme to them. While we would never rate these stocks as "strong buys", we think there might be a bullish trade in them near-term, only based on a tax- loss selling strategy.

Foundry Networks Chart - last five months.

Shares of FDRY look to be trying to consolidate short term and there's the potential for a gap to be filled in the stock. You know the longer-term trend is down. Target is thick red and "support" is just below recent lows.

Redback Networks Chart - last five months.

Shares of RBAK might also be due for a bounce after tax-loss selling is over. The big question for traders is when does it end. Today or December 31st at the close?

WorldCom Chart - last five months.

Who would've thought we'd be talking about WCOM as a tax loss sell? A year ago, institutions and investors couldn't get enough of the stock as it surged to new highs. Today it trades near lows that most can't remember.

-Staff Analyst

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