Magal Security Systems Ltd (MAGS)

Company

"Magal Security Systems Ltd. (Magal) is engaged in the development, manufacturing and marketing of computerized security systems, which automatically detect, locate and identify the nature of unauthorized intrusions. Magal also supplies Video Monitoring Services through Smart Interactive Systems, Inc., a subsidiary established in the U.S. in June 2001. The Company's products are currently used in more than 70 countries worldwide to protect national borders, airports, correctional facilities, nuclear power stations and other sensitive facilities from terrorism, theft and other threats. Israeli-based Magal has subsidiaries in the U.S., Canada, the U.K., Germany, Romania, Mexico and an office in China." (company website)

Sell short

2-Jun-05. Magal has been in a downtrend for the past twelve months (see sidebar). This week it touched up with the 50-day moving average again and then continued down. The move on Monday was a big gap up on huge volume, but it ended the day lower than the open. I am going to interpret that as exhaustion, a last-gasp as it were.

• Price momentum (PPO) — has generally been rising, but level for past three days
• Trend (ADX) — selling pressure (-DI) sharply up and headed to cross above buying pressure (+DI)
• Money flow (CMF) — negative for several weeks
• Relative strength (RSI) — pointed down again after gap up
• Volume — down by about 50% over past two months

Buy to cover

7-Jun-05. I really wasn't planning to cover MAGS just yet. With shorts, there are two things to worry about: (1) a sudden jump in price when the downtrend reverses and (2) a precipitous drop that would yield a tidy profit if you could cover at that price. I've noticed that this second condition often occurs in the first few minutes of trading. Accordingly, I now immediately place a buy-to-cover order as soon as I short a stock; I pick some lower price that would be a reasonable gain (say 50¢ per share). If the stock moves lower in an orderly way, I can keep ratcheting the bid lower; if the stock makes a big drop, the open order may execute and catch a nice profit. That's what happened this morning with MAGS (see chart below).

MAGS 2-day chart, 10-minute bars

Looking at the chart, one can see the obvious problem: Although the price went back up after my order executed, it stayed low enough for a nice loss for the day. I got the sure profit, but if my price had been set just a few cents lower, I would be positioned to take advantage of future drops.