PCX: High Risk and High Reward

PCX has been the killer momo play for 2008. The stock has more than tripled, and has been relentless since breaking out in April, going from $50 to $150 in about two months. When I say relentless, I mean relentless. In that span, there was not even one high volume selloff. The few down days the stock did have were on relatively weak volume, which is a bullish signal. At least, until Thursday.

Thursday marked the first high volume down day. Not only was it a down day, but a "rough and imperfect" bearish engulfing candlestick pattern also printed.

Want more bad news? Here it is. The stock ranked 18 out of 7000+ stocks in my properiety scan for extended stocks. I never short based on this scan alone. There need to be other factors. PCX has ranked high on this scan for quite some time, but only now (after the first distributive volume signal) am I thinking of shorting.

Note that shorting a momo stocks is never easy and can be a hair raising experience. I actually don't recommend shorting PCX. Those that do enter short now better be fine with taking a loss.

If I do enter a short position here, I will manage risk closely. A logical stop would be around the recent high in the $162-165 range, with a target at the 50 day moving average, around $100. That would give about a 5:1 reward to risk.