DE Core Position Follow Up

Last week I was debating whether to cover the core short DE as I was looking for the market rally to take numerous stocks (short set ups) above their nearby ranges, DE has a wide trading range and a possible move above it was why I was considering covering and adding it back at better levels.

This is the last update posted for DE, you can clearly see what we were looking for, this was posted October 17th (last Thursday). If you are serious about DE as a core short (and I like it, it has done very well for me thus far and is not even close to fulfilling its downside potential), then I'd take the time to read the last update linked just above either now or later (after market).

DE DID NOT make the breakout and CAT (which looks nearly identical to DE) missed today's earnings on both Revenue and EPS and even worse, they guided lower which is all the market really cares about (not what you did, but what you expect or they expect you will do moving forward).

This obviously changes our DE short set up or the possibility of it as I still wasn't convinced and thus did not cover the core position (short).

While CAT is down over 6% right now, DE is down a fraction of a percent, I believe this is because of what I'm going to tell you later, although the two companies are in the same Industry and sub-industry group, CAT clearly is more geared toward large construction than DE and as a company with more of a world-wide reach, CAT will suffer more for what we've found.

Bottom line, DE can still set up a nice core short entry, but I want to give some alternatives as well, I will continue holding DE for now.

 These are the head fake areas in which DE would have been looked at as a core short position, the best was the head fake move outside what looks like a large bull flag (the second yellow circle) and we entered near that price point as DE is in the green and has been for some time,.

The reason I was considering covering and adding DE back was the range and the probability (like GOOG) for a breakout above the range which sets up a head fake /false breakout and an excellent, low risk entry. The eventual move following that would be expected to continue a primary trend to the downside.

This is the Distribution on a daily chart of DE, with Money Stream...

You can see the accumulation at the 2009 lows, distribution at the new 2011 high, a double top head fake move and the continuing distribution in DE to lower lows in Money Stream.

 This is the 15 min chart with two channels inside the larger trading range, today's move "looks" like a classical short set up, a break below support, a rally that fails at support. Traders shorting DE as they are likely to do with the CAT earnings, would be placing their stops just inside the channel, so a shakeout move inside the channel is likely.

Some of you may recognize this pattern as a small Channel Buster, the initial move (down) is typically followed by a head fake move that moves the opposite direction, shaking out new shorts.

 This is the hourly chart, you can see this large descending channel that I compare to a large bear flag on the first chart, the yellow circle is the head fake move and ideal short entry, but this 60 min positive divegrence in the trading range since is why I thought DE had a good chance of a head fake move above the range, setting up a better short entry and thus the reason I considered covering to add the short back at higher levels.

The 30 min chart is more detailed and seems to show a failure in the divergence, it may have been a CAT earnings leak or more likely just an understanding of the global economy (tonight's post will make much more sense here). In any case, the positive to negative may be what held DE back from making that upside move.

The 5 min chart shows the same exact thing and the 18th plays prominently in this scenario as well.

So here are my two trade setups I'm looking at, the first (1) would be the same as what's in the last update, a breakout above the range which is an excellent head fake set up, I'm surprised Wall St. would let it go by unless CAT is just too heavy an anchor as they trade nearly identical. We'd double check for distribution before entering a short above the range, but it is the best entry right now and the lowest risk.

The second entry (with the new situation -CAT, etc.) would be to look for a break down below the range, this will draw in the early shorts and they are almost always shaken out, their stops would likely be just inside the range , but only AFTER prices break below the range. Wall St. knows where they'll put their stops and they can see them as well so a shakeout move back inside the range would be the second short set up.

You may ask, "We;; we are essentially at the same area as entry #2 would eventually be, why not short DE here and now?" There's no reason you couldn't, I just see the timing issue as causing opportunity cost. The real move we are looking for is a larger downside trend, likely a primary bear trend, if you enter here and entry #2 plays out, in a month or so price will just be back at the same level you entered at today as those shorts will almost certainly be shaken out, so essentially unless you covered on the break below and took profits and re-entered in the channel, you'd just have a month or so of opportunity cost where those funds could be used to fund other positions that have a higher profit potential.

There is something to be said about having short exposure in place as things are changing in the market quickly, the Black Swan or SKEW Index is rising, we have numerous troublesome signals, but that's more of a personal "Risk tolerance" and potential opportunity cost that is really a choice each person has to make for themselves. For now since I already have a better entry level in DE and it's green, I'm just leaving it in place.