The long and short of it

worry

What, me worry? You bet!

. I've been trying my hand again at selling stocks short in the market, trying to improve on earlier results, which were nothing to crow about. Cry, yes. Crow, no.

peaks and valleys of down-trending stocks

Stocks don't go up or down in a straight line, but in cycles of peaks and valleys. In the case of stocks in a downtrend, each successive peak and valley gets lower than the one before it. For selling short, the trick is to sell at a peak, just before it slides back down into another valley. But here's where it gets tricky: While I'm betting that the stock is at a peak and will go down from there, others are betting that this time the stock will break above resistance and start a new uptrend. This makes for a lot of nail biting. You don't want to be frightened into covering the short prematurely, but you also don't want to risk losing your shirt if the stock does break out.

QLTI 1-month chart

I shorted QLT Inc (QLTI) at the beginning of July, selling short at $7.05. Since then it has closed as low as $6.28 (putting me up 12%). So far so good: peak to valley to a new lower peak — I hope. But what if it's a breakout? How high can it go before I get all wobbly and cover the short? Under the best of circumstances, this is a fine line to tread, but in a volatile market like the one we have now, the least little thing can set off a boomlet or a bustlet.

Today, QLTI suddenly jumped, for no apparent reason. Does somebody know something the rest of us don't know? The real-time intraday chart gave some clues.

QLTI intraday chart 26Jul06
QLTI intraday chart 26-Jul-06, 1-minute intervals

Yesterday, QLTI closed at $6.58, a nice safe price. But when the market opened today, the first trade bumped the price up to $6.70, an increase of 12¢, or almost 2%. From there it went crazy:

9:30am4,800 shares @ $6.70
9:44am11,000+ shares @ $6.70
10:48am281,000+ shares @ $6.64
10:55am25,000+ shares @ $6.79

The beginning of the trading session is often quite chaotic, and when those big volumes hit, momentum picked up and (irrational?) exhuberance drove the price up to $6.79 (+3%). After that, it stabilized near the opening price. At that price, I'm still up 5%, but feeling anxious.

QLTI is scheduled to report earnings tomorrow morning before the market opens. What happens then is anybody's guess.