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Stock giving back early session gains

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Stocks have given back most of today's earlier gains in what is beginning to look like a good round of profit taking. If it's anything more than that, then traders may be wanting to play a little defense in their portfolio's.

Not every stock is a good looking short, but I do think that shares of Cisco Systems (NASDAQ:CSCO) offers the bearish trader an opportunity to perhaps play some downside with relatively nominal risk. Here's what I'm looking at in a bearish play on Cisco before the close of trading.

Cisco Systems Chart -

In the past couple of weeks, CSCO has had one heck of a time getting above the $17.50 level and perhaps retracement on the stock as outlined above is reason why. With recent negative news out of SBC Communications (NYSE:SBC) and potential cutbacks in IT spending for newtorking equipment, we might be seeing some depletion of inventories or bullishness toward CSCO at the $17 level. I like a bearish play in CSCO at current levels of $16.58, with a stop just above at $17.55. The first test of potential support would come near $15.93 and ultimate target to the downside on a good round of profit taking would be in the $13.50-$14 range.

Bullish Percent data

Yesterday in the 11:00 EST update, we alerted traders that the NASDAQ-100 bullish percent chart had reversed back into a column of O's from a 62% reading to 56% and gives hint of some early weakness for the internals of this rapidly oscillating indicator. While I don't expect a severe decline in the market short-term, it never hurts to mix in some shorts from time-to-time. The S&P 500 bullish percent ($BPSPX) is still in a column of X's at 44%, so I want to be looking for stocks to potentially short that are very close to an identifiable level of resistance, where a bearish trader can control their risk.

Let's take a look at Cisco's relative strength vs. the S&P 500 and see if this stock is outperforming or under-performing the S&P 500.

RS of Cisco Systems vs. S&P 500 Chart

Until CSCO can show some type of RS "buy signal" I'm thinking the market will continue to look and try and short the rallies this stock seems to offer. While CSCO's move to $17 from the bottom of $11 (on its bar chart) was impressive, the relative strength chart was not impressed. Had a trader simply sold the stock back in September of 2000 based on the RS sell signal near $60, they might avoid the stock from the bullish side until some type of RS "buy signal" is found. A bearish trader however will keep picking away and shorting rallies until he/she is proved wrong.

Jeff Bailey
Senior Market Technician
Option Investor

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