Short opportunities within the North American Telecom Index ($XTC): TDS, WIN.

During my sector scans this evening, I noticed that there was a lot of activity within the North American Telecom Index ($XTC). The ADX was super high (way above >40) and it seems to have broken down from a base.



However, widening my scope a bit to the daily charts, I noticed that not only did it break down from its current base, but that its current base is a "base below a base" formation.



For me, this breakdown could indicate a short-selling opportunity (or a PUT-buying opportunity) -- tip: remember to set stops as soon as you enter a trade.

Scanning stocks within the sector, I found two candidates which appeared to be ripe for a short sale: Telephone and Data Systems, Inc. (TDS), and Windstream Corp (WIN).

Regarding TDS, the first thing I noticed was that the ADX was above 40 indicating activity within the stock.



Then, the next few things that I noticed were that the stock had a potential double top coupled with the relative strength of the stock weakening, and a negative response from the institutional investors (e.g. selling).



I would say that a break below my trendline should signal a short position.

The second stock within this sector not only showed a volatile stock within a volatile sector with an ADX above 40, but I immediately noticed the formation of a Head & Shoulders pattern which usually occurs at a top before a steep decline. This formation can be seen in the grey box.



Looking at the 10-day chart (at a period of 15 mins), I further saw the formation of a Head & Shoulders position, as well as weak relative strength, and increasingly heavy institutional selling.



What surprised me about this stock is that when I widened the scope of my viewing of the stock, I noticed a few things that almost made me laugh at the confirmation that this is likely a bear stock -- I saw that not only was there the Head & Shoulders pattern I noticed in the 10-day chart, BUT that pattern was really a "base below a base," or literally, a "Head & Shoulders pattern BELOW a Head & Shoulders pattern" which should indicate a very strong price decline is likely underway.



Looking further at this chart, it was exciting for me to see that the larger and first Head & Shoulders pattern came right after an attempted breakout from a 3-month base. That's definitely a negative sign. Further, as a sign that the breakout should not have been given much importance, traders should have noticed that the breakout was on average volume which means that the breakout didn't have much strenth. So, I would consider shorting the stock at this point.

ALL THIS BEING SAID, I took a look at the options available on these two stocks and I was disappointed with what I saw. Because the stocks are likely not traded as much as I would like them to be, the options instruments are not readily available and thus have a wide spread between the buy and sell (or, ask and bid) prices. This is not favorable to me because in the past, I have purchased an instrument with such a wide spread between the bid and ask prices and as a responsible trader, I set my stop based on the market action, but when the stock rose and subsequently moved against me towards my then stop price, it triggered and it sold at the low bid price. So, even though I wasn't wrong on the stock's direction, because there was such a wide spread, I lost anyway even though the stock was technically "up" in my favor.

For this reason, don't invest in options with wide spreads because it could cost you money if your stops are triggered, even if you were right on the stock and it has moved in the direction you believed it would move.

Thus, there will likely be no trades for me tomorrow on these assets.