Tuesday, January 20th, 2009
Thoughts on short selling stocks, part II
I recently outlined some thoughts on short selling stocks. Here’s part II:
7. The best pattern I’ve found to identify ‘spiv’ stocks breaking down technically is described in William O’Neil’s How to Make Money Selling Short.
8. The pattern begins with an initial sell-off, sometimes a break of a neckline in a head-and-shoulders-type pattern. This attracts early shorts; but they get ‘run in’(forced to sell out because of rallies) because almost everyone else is bullish and thinks the falls are great buying opportunities. The stock keeps rallying. But the smart money is starting to realise the game is up and uses the rallies to offload stock. Eventually these rallies peter out and the stock breaks down again – that’s the time to short.
9. But it’s not the best time. The best time is when the stock rallies back up to the sideways movement (congestion or resistance) caused by the failed rallies described above. You short when that rally fails and it breaks down for a third time.
10. ‘Spiv’ stock short set-ups usually occur at the start of a bear market. Once the bear market is under way another good time to short is a big rally to the 50-week moving average, which then fails.
11. I like to have signs of fundamental weakness of stocks I short once the bear market is under way: decelerating earnings, losses, etc
12. Unless a stock has rallied – and failed – at its 50-week moving average, I’ve found that shorting when the 50-day moving average is rising is a bad move.
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January 21st, 2009 at 1:01 am
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