Waste Management: Time To Dump And Short

The chart for Waste Management, Inc. (WM) is a classic demonstration of a broadening top formation where the Designated Market Maker does not want to tie up his inventory any longer than necessary. The blocks of August 1 and August 31 are “control blocks” he will use to maintain the current trend.

The block of August 1 which traded at the beginning of the broadening top was most likely a distribution. The block of August 31 which traded at the end of the broadening top was most likely a short.

If these assessments are correct, then the Designated Market Maker will need to lower the price in order to cover his short positions.

Although these blocks are relevant to the extent that they will facilitate the short to intermediate price objectives of the Designated Market Maker, I do not believe they have the impetus to serve as a catalyst for a major trend reversal. Therefore, I expect this issue to revisit the baseline where the DMM will replenish his inventory and advance Waste Management to the ridgeline, in order to continue and preserve the current range bound trend.

A few other technical characteristics which give rise to my suspicions that this issue is going lower are:

Chart patterns – In addition to being much closer to the 52 week high ($36.35) than the 52 week low ($28.77) Waste Management is encountering resistance at what I consider to be a key point of the price structure. One ought not to ignore, the long red down candlestick on April 27. Waste Management is hitting resistance at the midway point of that candlestick which incidentally is very close to the price point of the block which traded on August 31, which (as previously stated) I believe is a short.

Candlestick patterns – There are hanging men, doji and shooting stars which as you already know are neither bullish nor bearish, in and of themselves, but are biased on the basis of where they occur in the price structure. In this case, they appear at the top which would give them a bearish or downward bias.

Volume – The spike in aggregate volume on August 31 and September 4 are indicative of the Designated Market Maker and other exchange insiders dumping at or near the highs to the investing public. Volume has subsided significantly which implies to me that demand is no longer being encouraged because his inventory levels are diminished and his short positions are established.

It is important to understand that when the “talking heads” on the financial channels comment on the low volume in the market, they intimate that the volume needs to increase in order to validate a rally. I on the other hand view low volume as an indicator that the trend at the time will continue. I believe that heavy volume is a catalyst for reversals. That is to say that heavy volume in a topping market is bearish and heavy volume in a bottoming market is bullish. In the simplest of terms; the true center of gravity of any issue lies between the heavy volume at the ridgeline and the heavy volume at the baseline.

On the basis of the foregoing, these are my views and observations:

The Trade:

I recommend establishing a short position in Waste Management. Open your short position (First Sell) with only ¼ of whatever capital you intend to commit to Waste Management at $34.58 or better. Cost Average (Second Sell) the remaining ¾ of the position at $37.35 and stop out at $38.81. Do not post your stop loss. I have said it before but it is so important that at the risk of being redundant and in an abundance of caution I will say it again. It is too easy for the Designated Market Maker to cash investors out by moving the price above or below your stop out and move the price right back up or down again. In addition, when a stop out is triggered it converts into a market order and that could be disastrous if the DMM decides to really take advantage. Remember the “Flash Crash“? I would be looking to cover this position with a downside price target of $31.81.

There is always the possibility that the trade may not work out.

There Is Never A Sure Thing (particularly on a short)

Investors must realize and recognize that there is never a sure thing. Sometimes events that have a low probability of occurring bring forth very serious consequences should they come into being. Investors must judiciously consider what the inherent practical limits are and how much they stand to gain in relation to the risks involved in establishing any position.

In addition, persistence can become desperate folly by allowing a losing position to become a viable argument for deciding on a new position. Rather, such decisions should be based on the current and soon-to-be circumstances.

Any position in which one unexpected factor has a significant impact on your portfolio is the result of poor planning. It is a fault most commonly associated with people who want to explain away their losses. SUN TZU – Art of War “Use an attack to exploit a victory, never use an attack to rescue a defeat.”

If you follow the process recommended and the trade does not work, the overall loss in this model is $3,000.00. That amounts to .003 of the overall portfolio (theoretically valued at $1,000,000).

Finally, never be a brave and brainless investor because a fool and his money are soon parted.

A portfolio of $1,000,000 should position size in the following manner:



Disclosure: This is a trade, not an investment. Be ever vigilant. See Performance Tracking here.