Market Talk with Piranha is currently moving to its new home at chrisperruna.com. The new site is up and running but many of the posts need editing as the images and stock charts did not transfer successfully (thanks blogger). I will post all new entries to both blogs – Thank you for your patience while I make this change!

Tuesday, November 28, 2006

Make Money Selling Short

The headline may sound weak but I borrowed it from the book “How to make Money Selling Stocks Short” By William J. O’Neil. It’s not a book your typical day trader or professional scalper will be interested in reading but it’s ideal for people like me that still trade longer term trends and don’t necessarily do this for a profession. I intend to travel that road one day but now is not my time so I must stick with techniques I believe work and have “actually” worked for me in the past (and present).





I jumped on the potential band wagon early and started to screen for shorts back in early October and I was wrong. More recently, I placed a few positions and was both right and wrong as the market trend was still moving higher and I knew this but I was conquered by human emotion to make the short trades anyway. Luckily for me, two of the trades show a profit while three losers kicked me quickly for smaller losses.



What do I look for when searching for shorts in what I consider reverse CANSLIM? It’s simple; I read the book by O’Neil, study the charts from the past and look for those same characteristics in stocks trading today.



Many traders believe that the most obvious area to place a short would be near the peak of stock’s trading range but I have found this to be untrue.

Characteristics of Longer Term Trend Shorts

  • Most ideal longer term “trend” shorts take four to twelve months after the peak price to setup on the weekly chart with the majority of these shorts triggering between six to nine months.

  • Look for stocks that had prior up-trends and support levels that can now act as downward resistance or entry areas.

  • Once a stock tops and starts to consolidate, you want it to slice through the 50-d moving average and then the 200-d moving average.

  • A crossover between the 50-d m.a. and the 200-d m.a. is ideal and is graphically presented on each chart in this post

  • The odds of success increase with each failed attempt for the stock price to recover these major long term moving averages.

  • Head and shoulder tops can also serve as ideal setups for potential shorts if they take at least five months to develop.

  • A decreasing relative strength line and a negative pattern on the point and figure chart can also confirm that the stock is rolling over and setting up an ideal short.

  • Finally, volume should be increasing and the stock should be under distribution as it violates the major moving averages and starts to break former support levels.

No one knows when this market will roll over so study the ideal characteristics now so you are prepared to recognize them when they appear. I have screened about two dozen potential shorts in November on MSW with several of them working while the others have failed. I was early with my analysis but more stocks seem to be building bases like the ones from the bubble burst in late 1999 and early 2000. Compare the three examples from today that I have posted to the four shorts from the past that setup perfectly if you would have recognized them six years ago.







For further reading, see my two part article on shorting and the book by O’Neil – the charts alone are worth the price!

Shorting Stocks – The Basics, Part I of II

Shorting Stocks – The Basics, Part II of II




Piranha

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8 Comments:

At 11:00 AM, Anonymous henrietta said...

Great post on shorting. If I could add I normally like to avoid candidates that have smooth uptrending charts on weekly & monthly. Stocks that have displayed erratic up and down swings are the best candidates.And when they drop, they drop as if they are out of style.

Henrietta

 
At 11:58 PM, Blogger mike said...

Chris:

A few things.

First, in the spring when we were hitting the highs and people were expecting a decline I did some research and looked at stocks that declined the most from a prior market decline/pullback (I believe I used early 2002). I found as did O'neill that those that peaked at least 90 days before dropped the most. I also found that those already down by 15% to 20% fared the worst; some of those that looked like there were peaking but hadn't already dropped had the strength to stay up or even continue up. In general the percentage of those that dropped signficantly were much higher if they had already dropped some, which I think most likely you can see with the 200 day/50 day averages.

One other thought. Over on the wishingwealth site Eric has pointed out that the new Proshares ETFs that trade at double the market (QLD, etc.) have outperformed a very high percentage of NASDAQ stocks since July. It therefore may be just as likely (and may be easier) to simply buy the QID or the DOG or simlar ETFs if you feel strongly the market is turning.

 
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