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Rising Tides Lift More Than Just Boats

After being up for 6 straight days, USEC Inc (NYSE:USU) has finally had a red day. Yesterday’s accelerated gains was actually an early warning sign, but often small market cap companies can have 2 or even 3 consecutive days of huge gains before falling apart. However, a red day is a sign of a shift in momentum. So far, the downward move has not yet erased Thursday’s big one-day gain, so it is possible the stock is just cooling off to go higher. But at this point, I am looking for the stock price to prove to me it can go higher before I jump in. If I had bought when I first alerted this stock at 54 cents, I would be selling now for a very handsome percent gain. If it breaks out above 85 cents, or at least proves to me it’s not breaking down any further, I would consider this a potential re-buy, but I have no interest in trying to guess the bottom to buy on the cheap.

Remember, Austrian economics teaches us we cannot know what future demand will be, and shares in a stock have a supply and demand just like any good traded on any market. We cannot predict, we can only prepare for likely scenarios and be ready to react.

Listeners of the Peter Schiff show may recall months ago when he warned of Jonathan Lebed and the National Inflation Association’s pump and dump scheme of BroadVision Inc (NASDAQ:BVSN). The NIA have long since stopped pumping this stock, and it’s been in free-fall ever since, but every now and then it has a big, multi-day run-up, and these run-ups provide technical opportunities for short-sellers.

There are two reasons why it is a good idea to consider short-selling BVSN. First, as most Austrians can probably appreciate, is the stock price is ultimately destined for de-valuation. Short-selling BVSN is making a trade in the directions of fundamentals, which will reward you in the long-term. The second reason is because BVSN is experiencing a technical event.

Unlike other aspects of technical analysis, which require a degree of subjectivity in guessing what key price levels are, technical events are more objectively grounded. The technical event we have here is a short-squeeze. A short-squeeze is basically when short-sellers are looking to close their positions, they must buy to cover. This buying, however, represents the closing of positions and is in no way indicative of speculators seeing future strength in the stock. The squeeze happens when the market somehow coordinates short-sellers into covering all around the same time. The sudden surge of buyers in a stock, especially a stock that is volatile, has a low float, and/or is trading in low volume, can send the price skyrocketing.

Regression to the mean is almost a gift from the market to short-sellers. However, sometimes the price surge can get the attention of real buyers and create some upward momentum. Sometimes this catches short-sellers off guard, and they have to cover and even higher prices still just to avoid being wiped out, so this move is not without its risks. In an ideal world, the safest way to play this is to wait for the first red day. The problem is in order to short sell, your broker needs to find you shares of the stock to borrow, and once momentum has shifted to the downside, those shares quickly become unavailable.

BVSN looked like it was finally ready to break down yesterday, so I entered a short position, mostly hoping for an early morning panic this morning. That didn’t happen, so I made sure to get out right away. Short-sellers generally don’t like holding over the weekend because there’s too much risk of positive news coming out during that time. This is the sort of thing that can coordinate covering and send the price higher. However, anyone who was going to cover before the close will be covered before the close, so if this stock spikes big at the end of the day, that spike may be the ideal time to short. It’s always nice holding an unrealized profit in a trade while awaiting the big move.

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