Against the Grain – Shorting Rules for Individual Investors (TYL)

Against the Grain – Shorting Rules for Individual Investors (TYL)

Short sellers are a rare breed. And during a bull market, those who make a living from the short side are an even rarer commodity.

A Rising Tide Lifts all Boats

Fighting the overall trend is a mug’s game if you’re an amateur. The general swell of a bull market means even unworthy stocks will move higher with the crowd and that’s a certain death for the ham and egger who believes he can pull off a quick score with a short sale.

The best shorts are, rather, those who have forensic accounting abilities and industry connections. The ability to navigate the guts of a quarterly report is a tremendous advantage, but knowing what’s happening on the inside of a sector is equally important – and rare.

Consider – some of the best information available on Chevron comes to us from Exxon executives. From them, we learn about key management people who are leaving the company or jumping to a competitor. Or about new technologies or initiatives that are shortly to come to the market’s attention. Or about internal project cost overruns that could jeopardize a company’s quarterly earnings and send the stock swooning.

In short, those who know the industry ‘inside’ are at a great advantage in the short game.

We here at Oakshire employ a very small team of expert analysts to keep you informed. We’re connected to a variety of industries and analysts, both private and public, as well as those who haunt the caverns of Wall Street. On our staff, we have significant, personal industry insight into management systems and that, too, gives us an advantage in speaking about the potential trade we’re going to propose today.

Of course, to top it all off, we also have the benefit of years of charting experience that add to our stock and option selection regimen.

Kick it off, brother.

That said, we’ve stumbled upon what looks to us like a very plausible short sale opportunity in a stock that we’ve several times highlighted in this space over the last few years.

It’s an outfit called Tyler Technologies (NYSE:TYL), it’s headquartered in Texas, and it appears investors are taking a very different approach toward its stock than they did even six months ago.

Have a look at the chart –


This is two years worth of daily action for Tyler, whose shares have nearly tripled in the last 24-months, bringing the stock’s P/E to a recent high of just under 90x trailing earnings at the January highs.

But since then, the stock has struggled. It pared more than 30%, before bottoming recently in the $75 range.

And we don’t think the move is over.

A look at the six-month chart will help explain.


From the six-month chart we get a clearer picture of the latest action, especially the last week’s trade, which, in our view, seals the deal on a Tyler short.

But first –

Take a look at the January through May correction. What’s most important to us is that a full five-month decline never managed to even glance off the long term (411-day, yellow) moving average, marked as #1, in blue. It’s not unheard of for a stock to reverse before touching that marker, but in our experience it is a rarity, and because of the duration of the decline and the depth to which the stock fell, we believe the subsequent bounce higher describes a false bottom that will now have to be fixed.

And the rest of the technicals support us.

Look, for example, at the RSI and MACD indicators (in black), the former of which registered an extreme overbought read just two weeks ago, triggering an immediate bout of selling. RSI has since dived below its midway waterline, putting us on warning that the potential for further declines is real.

MACD indications also support that contention, crossing lower just days after the RSI 80 read and now heading toward sea level. Should they confirm RSI’s latest submarine action we’ll likely get strong selling from the technical community. Such a move, if it indeed transpires, however, is still a few days away.

Finally, we have price action itself. A blow-up of the latest action on the chart (below), shows TYL could be in grave and imminent danger.

Have a look –

Price has now fallen below the bunched moving averages at $87 and the 137 DMA has turned over and is now tracking lower.

If TYL separates from its moving averages and moves lower to occupy the space between $87 and $77, where the long term MA sits (yellow), we believe it will eventually come to ‘land’ at that lower marker and signal a final bottom to the stock’s correction.

And that’s why we say short it.

Many happy returns,

Matt McAbby, Senior Analyst, Normandy Research

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