Option Investor
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Day trading for a living

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This morning in PremierMarkets.com "hot list" I felt that bearish traders might do well with a short in shares of Cisco Systems (NASDAQ:CSCO) at the open. That trade has worked so well for a day trader willing to short 1,000 shares that I thought we'd add to the "sector" and its downward decline with a day trader's short in Foundry Networks (NASDAQ:FDRY). Here's what I was seeing in shares of FDRY within the past 30-minutes and why I don't think today's current 12% decline is over.

Foundry Networks Chart - 60-minute interval

Success breeds success. With shares of CSCO doing so well to the downside, we went hunting for other "networking stocks" that might be suspect. One that I found was shares of FDRY. Using our retracement bracket, we can see that FDRY has tried to find a "base" on its 60-minute chart at the $10.47 level (38.2% retracement) but has given a couple of signs of technical weakness on the chart. At $10.35, the stock has broken below its 50-period MA and 38.2% retracement levels. It sure looks like market makers were perhaps doing some buying at $10.47, but then selling overcame buyers and they've quit trying to hold the stock up here. With the technique I've taught traders in the past, we might then believe that the next level a market maker sets his/her bid for some inventory buying would be near $9.61. While the stock may look "oversold" when it's down 11.68% a move lower from $10.35 to $9.61 represents a 7% decline. If I'm a day trader rolling from stock to stock that looks to be breaking down short-term, I might like to get short 1,000 shares at $10.35, with a stop just above the last hours high of $10.54 and be targeting $9.61. If the stock really sees some selling over the next day, $9.00 isn't out of the question. Just remember that the stock is currently up 72% since early April. While some traders probably think the stock is oversold short-term, there might be some bears that think the stock is overbought. Think both sides of the trade, monitor the technicals, and take action if warranted. Always use a stop just in case you're wrong.

How's the Sector?

Another thing I liked about a FDRY short was not only that we were doing so well in our CSCO short, but that the Networking Index (NWX.X) was leading the NASDAQ decline. Much like a lion chasing a herd of wildebeest, the lioness seeks out the weak animal in the herd. If she can't take down the weak ones, then why bother with the strong ones?

Setting your stop

Another reason I liked FDRY, as a day trading short was that I could control my upside risk using the previous hour's high. Notice how even on the 60-minute chart you can see some consolidation for about 3 hours (3 intervals) and then another breakdown occurred. If I'm a believer in supply and demand, it makes sense that the stock has NOT been able to break above its previous hourly high. Therefore I can place my stop just above the previous hour high at $10.54 as my stop. Once an hour passes, I then move my stop down to the next hour high. This is what I call "the aggressive python approach" to squeezing profits from a trade and reducing risk in the trade. It's a great technique for active day traders.

Jeff Bailey
Senior Market Technician
www.PremierMarkets.com

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