The Turkey Shoot
Imagine that you are on a turkey shoot. You hear a wild turkey calling in the woods, then spot his tail moving behind a fallen log. You bring down your rifle and focus on an area along the top of the log. You are ready to fire the moment you see the turkey’s head pop over the the rim of the log.
O.K., the example is a bit grizzly, but the scenario illustrates key features of the “Turkey Shoot”, the most effective short-selling setup I know.
Turkey Country
If you’re going to hunt turkeys, go to turkey country. Here’s what to watch for to let you know are hunting in the right woods:
1. Initial Distribution: There must be good evidence of topping action. Initial distribution is not always easy to recognize as it is taking place because the target will sport a recent history of strong price performance. However, for this setup it is not important that you identify a congestion area as distribution in advance of an initial decline, but only after the fact.
2. Sign of Weakness: After a period of initial distribution, the target demonstrates that it is weak by declining sharply. This sign of weakness should be convincing. Often a clear sign of weakness will break the stride of the target’s recent advance by piercing trend support to the downside. A sign of weakness confirms that the congestion overhead was indeed a period of initial distribution.
MAY
The chart of May Department Stores shows the three conditions which alert the trader that The Turkey Shoot setup is in the making.
3. Secondary Distribution: Because the stock has a recent history of strength, there are still plenty of bullish traders around, ready to buy into weakness. For that reason, the first rally after a sign of weakness is likely to retrace at least 50% of the decline. After a recovery rally, trading settles into a range between the recent low and the recovery high. The combination of a sign of weakness plus labored range-trading after a partial recovery provides good evidence that the target is under selling pressure–that informed interests continue to distribute to weak-handed traders.
Evidence of weakness is critical. Would you step into the ring with a tall, strong, well-conditioned boxer? I wouldn’t. My way is the coward’s way, and the coward’s way is to let someone else knock the fighter to the mat before I step in. Similarly, I want a clear demonstration that the once-strong trend has been broken convincingly by strong sellers before I will consider a short-sale.
Shakeout
Once evidence of secondary distribution is in place, the trader must be ready to shoot as the turkey’s head pops above the top of the log. Here is the setup: price must make a new recovery high just above a previous, significant high-water mark, but below the zone of initial distribution. Poor price performance has forced out weak-handed longs and attracted short-sellers. Once weak sellers have completed their selling, the stock becomes technically strong. The rally to a breakout above well-defined resistance forces shorts to cover and prompts weak longs to establish new trading positions. As a result, near-term demand is exhausted, and the technical condition of the stock is weakened again. Trapped by the shakeout, both weak bulls and weak bears will sell again should price begin to decline.
In the chart below, shares of May Department Stores make a strong move to a recovery high, above not only the range high around 43, but also above the short-term recovery high established prior to the sign of weakness. The target may offer more than one possible high-water mark, or ‘top of the log’. In deciding the level at which to establish your short position, note the current price-volume action. If spread is expanding as price rises, the rally likely has further to go. Look for spread compression on increased volume to tell you that buyers have encountered important supply. If there is good evidence that supply is reasserting itself on the break to a new high, then take a partial short position and add as price sinks back below the top of the log.
MAY
The next chart shows that the shake-out was the final point of supply before an extended period of liquidation.
MAY
The next chart of Campbell Soup offers a different look at the Turkey Shoot setup. All of the preconditions are in place (again, initial distribution is hard to spot in advance of a sign of weakness). The initial recovery high to the mid-fifties is a candidate as ‘top of the log’, but there is an even more significant price target for the recovery rally, and it is already in place prior to the sign of weakness. In this case, that price is marked by the gap left as the stock fell from its high in the low sixties.
CPB
Judgment is required to determine the likely ‘top of the log’. Candidates include the first recovery high after a sign of weakness as well as other significant price markers created as the stock descends from a period of initial distribution. Generally, the weaker the stock, the lower the breakout point at which the short should be taken.
As CPB (below) declines, momentum builds to the downside. Rallies now are likely to be weaker, and a rally into a Turkey Shoot setup carries only to the first, or most conservative, candidate for ‘top of the log’, the previous high point of the recovery. In the chart below, that point is marked as “A”. We saw in the example above that the earlier gap just below 60 was the ultimate target of the recovery rally. However, we now deem it unlikely that the gap left on the break below 50 will be filled.
CPB
More Examples
Below I’ve included additional examples of the Turkey Shoot setup. Study their similarities as well as their differences. Note that the setup can be used to enter short positions as the target is trending lower. Even though all of the examples in this lesson are daily-basis charts, this setup works in any time-frame and shows up well on one-minute as well as weekly charts.
MO
NSC
ONE
SBC
TOY
VISX
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