When one is looking for short candidates it is important to jump onto the laggards and to never short the leaders. Just like when a bull market is in full force, one should always buy the leaders.
In this current correction it is no secret that the financials have been the weakest. They led on the way down and have not fully recovered with the rest of the market on this current counter-trend bounce. Just check out the financial ETF (XLF) chart. It is looking very ugly at the moment, with the relative strength vs. the S&P 500 trending lower.
Ok, so we’ve identified the weakest sector, what about the best short candidate within that sector? Take a look at the choppy and volatile action of Icici Bank (IBN). Not only is this guy living below its 50 dma, it also has a horrible Accum/Dist rating of D in IBD’s stock checkup. Another nice thing about IBN is that it has come a long way up, giving it plenty of room on the way down. Another reason to short Icici Bank is that it is an Indian bank and we all know that the emerging markets tend to go down a lot more than the US during corrections.
The only problem now is to find an entry point.
Before considering if we should wait for a bounce back to the 50 dma, consider the possible downside of IBN. Below is the weekly chart, which shows the dangerous broadening top pattern. These patterns often result in huge drops, so it might be prudent to just short it now instead of waiting for a bounce. We could also wait for it to hit support around 31, bounce and then short, because this guy is headed to the 26 level.
My plan is to wait for a small bounce, and buy some put contracts. The premiums will drop a bit if IBN can get back up to 38.
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