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A tale of two shorts

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Earlier today, we received an e-mail from a reader about possibly shorting Blockbuster (NYSE: BBI). Let's compare Blockbuster to Merck (NYSE:MRK), using point and figure charts, to see which might be the better short\put candidate. First lets take a look at Merck.

Merck (MRK) point and figure chart - 1 box

Merck issued a sell signal back in early January with a bearish price objective of 66. This objective was calculated by adding up the number of O's in the sell signal column (14 O's), multiplying that number by 2 (standard multiplier for calculating bearish price objectives), and then multiplying that number times the box size (1). 14*2*1=28. This total is then subtracted from the high of the sell signal column of O's (94). 94-28=66.

So Merck, which is at 81, has a downside target of 66, or 15 points of downside potential. As an added bonus, the bearish resistance line also sets up as a nice place for a low risk stop. Now lets see what Blockbuster's point and figure chart looks like.

Blockbuster (BBI) point and figure chart - 1 box

A case can be made for Blockbuster being over-extended, with resistance at 16 and 17, but the stock is currently flashing a buy signal. If prices can manage to break through resistance, the upside target from the bullish vertical count is 29.5. For this stock to flash a sell signal, and establish a bearish price objective, prices would have to drop to 7.50. Based on these two point and figure charts, Merck offers better profit potential with lower risk. Just another way that point and figure charts can offer another perspective.

Jeff Bailey
Staff Analyst

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