I just watched this video from TradingPub where Chris Kacher and Gil Morales presented on “Short-Selling Principle & Technique” on April 9, 2012. This is a great 1-hour presentation on short selling, would recommend everyone to watch it.
Gil Morales also co-authored a book with William O’Neil titled How to Make Money Selling Stocks Short. I may read that and write a book review on it when I get the chance.
Some key points I took down from the presentation:
- Short only during bear markets, and during the earlier phases of the bear market trend.
- Leaders in the prior bull market trend. Look for signs of institutional support pulling out of those prior market leaders (previously driven up by the institutions).
- Very liquid stocks (volume of at least 1M to 3M shares a day on average), need to get out quickly during sharp rallies in the overall bear market.
- Entry Points
- Usually 8 to 12 weeks after the stock’s peak, when the stock forms bearish formations and then breaks out to the downside.
- Risk Management
- Stops of 3% to 5%.
- Moving averages that the stock broke through when going down would also become your upside stops.
- Look to cover when there is a huge break down on high volume so as to take the opportunity to cover easily, rather than when the stock moves back up.
- Set a profit target, ~15% to 25%, or at the Low made in the prior base pattern. Usually the stock will move below that Low, and then attempt to rally up. So cover your short when the stock moves above that Low, and if the rally fails, you can put in your short again.
- Head & Shoulders Top (H&S)
- Right shoulder (peak) should be below the left shoulder (peak), usually caused by a break down with high volume after the ‘head’.
- The neckline should be a descending neckline, i.e. negative gradient.
- If the market is already showing signs of a bear market, can start a small short position when the stock moves up towards and touches the 50-day (i.e. 10-week) SMA from below, else can short after the stock starts to break down again (e.g. below neckline).
- Late-Stage Failed Base (LSFB)
- A stock has had a big move, it forms a late-stage base, tries to break out but fails.
- Punchbowl of Death (POD) Top
- A stock has had a big move, suddenly goes straight down, everybody then piles in making it go straight up, then it goes straight down again to new lows.
- Length of formation is usually 22 to 45 weeks, preferably around 30 weeks.
- My note: It seems like a number of the examples shown have a Head & Shoulders pattern where the Head is actually shorter than both Shoulders.
When to Enter
- To decide when to enter, be cognizant of the general market. Usually these stocks break down at the same time as the market, so once that happens, you can enter your short around the ballpark area.
- One point of entering is when the stock cuts below its 50-day SMA, can potentially add to the position if the 50-day SMA later turns out to be a resistance.
- The 50-day SMA crossing below the 200-day (i.e. 40-week) SMA (aka Black Cross) increases the odds of success.
- Don’t use trailing stops. Rather, do short then cover, repeat if necessary.