China Precision Steel (Nasdaq: CPSL), a $186 million Chinese steel play (as if their name didn’t tell you that), is a fun little stock that likes to bounce around a lot. When all the Chinese stocks were on fire a few weeks ago, CPSL quadrupled from $3 to $12, only to follow the Chinese crowd by falling nearly all the way back down to $4 (they managed to do pull off a near-$50 million financing during their brief price s
pike).
Now, after reporting some pretty earnings on Wednesday, the stock has rebounded to $5. And you know what–it’s beginning to look like a good short for a quick 20% or so.
Yes, the company has some great fundamentals, but I don’t trust any of these Chinese companies and juding by the price action, neither does the market. The fact that people weren’t all that excited about these earnings initially, (the price only spiked at 10:30am even though earnings were announced at 8am) leads me to believe a reversal is likely. This (ignored by all the major outlets that have written brief summaries about CPSL’s earnings) tells me it’s a classic smallcap hype play, making it a potentially worthy trading opportunity.
I’m not going to short just yet–ideally, this little runup will continue, so there’ll be more downside potential when the price reverses (it won’t reverse all the way back down to $4, more likely $4.50ish so I’d like to short in the $5.50-$6 range, if possible). And to complicate the situation, I’m not necessarily going to short in the $5.50-$6 range because it could keep going to the $6-$7 range before we see the proper reversal pattern.
Welcome to the difficult art of short selling smallcaps; put them on your watchlist, respect their runups and only short when the indicators (fading volume, downward break in any sideways price action–ideally in the afternoon) tell you to.
Disclaimer: I currently have no position in CPSL, but I probably will soon.
Posted in Short Selling