CHART PATTERNS AND TIPS FOR SHORTING

CHART PATTERNS FOR SELLING SHORT:
During a bull market and the transitioning to a bear trend, the “Inverted” Head and Shoulders pattern is the only pattern with a favorable failure rate less than 5%. As the market confirms a downward trend, an Inverted Cup with Handle, Pipe Tops, and Inverted Head and Shoulders ordered according to their performance are the patterns with a favorable failure rate less than 2%, a decline of at least 26%, and an ultimate low in less than 55 days.

 CLIMAX TOPS: Many leading stocks top in explosive fashion. They make climax runs (when a stock suddenly advances at a much faster rate for one of two weeks after an advance of many months). In addition, they often end in exhaustion gaps (when a stock's price opens up on a gap from the prior day's close) on heavy volume. These and related bull market climax signals are discussed in detail below:
1.Largest daily price run-up. If a stock's price is extended for many months (it's had a significant price run-up from its buy point of a sound and proper base) and closes for the day with a larger price increase than on any previous up days since the beginning of the whole move up, watch out! this usually occurs very close to a stock's peak, or top.
2.Heaviest daily volume. The ultimate top might occur on the heaviest volume day since the beginning of the advance.
3. Exhaustion gap. If a stock has been advancing rapidly is greatly extended from its original base many months ago and then opens on a gap up in price from the previous day's close, the advance it near its peak. For example, a two-point gap in a stock's price would occur if it closed at its high of $50 for the day and the next morning opened at $52 and held above $52 during the day. This is called an exhaustion gap.
4. Climax top activity. Sell if a stock's advance gets so active that it has a rapid price run up for two or three weeks on a weekly chart (8 to 10 days on a daily chart). This called a climax top. The price spread from the stock's low to high for the week will be greater than on any prior week since the beginning of the original move many months ago. In a few cases near the top of a climax run a stock may retrace the prior week's low to its high point and close the week up a little, with volume remaining very high. I call this "railroad tracks" because on a weekly chart you'll see two parallel vertical lines. This is a sign of continued heavy volume distribution without real additional price progress for the week.
5. Signs of distribution. After a long advance, heavy daily volume without further upside price progress signals distribution. Sell your stock before unsuspecting buyers are overwhelmed.
6. Stock splits. Sell if a stock runs up 25% to 50% for one or two weeks on a stock split.  Stocks tend to top around excessive stock splits. If a stock's price is extended from its base and a stock split is announced, in many cases the stock should be sold.

7. Increase in consecutive down days. The number of consecutive down days in price versus up days in price will probably change and increase after most stocks start down from their top. You may see four or five days down, followed by two or three days up whereas before you would have seen four days up and then two or three down.
8. Upper channel line. In a few cases, you should sell if a stock hits its upper channel line after a huge run-up. (on a stock chart, channel lines are somewhat parallel lines drawn by connecting the lows of the price pattern with one line and then connecting the highs made over several months with another straight line.) Studies show that stocks surging above their upper channel line should be sold.
9. 200-day moving average line. Some stocks may be sold when they are 70% to 100% or more above their 200-day moving average price line.
10. Selling on the way down from the top. If you didn't sell early while the stock was still advancing, sell, on the way down from the peak. After the first break down, some stocks may pull back up in price one time."

 

SELECTION CRITERIA FOR SHORTING A STOCK :

1. DON’T short with a RISING moving average, RS line, or MACD line.
2. DON’T short stocks with low volume (trades thinly) because it doesn't take much to panic the other shorts.
3. DON’T fall for a sucker short (too good to be true).
4. DON’T short a stock in a strong industry group.
5. Best if the stock had a significant run-up before topping out with no significant areas of support below.
6. Best to short with relative weakness (stock price dropping and index is going up).
7. Best to short when volume is higher than when the stock was climbing.
8. Best to short when short % of float is greater than 8% and stock has a negative cash flow.
9. Best not to short a stock with a small number of shares outstanding.

NOTES ON SELLING SHORT:

1.Half the shorts don't pull back to the breakdown point.
2.Sell in the first hour of the market's open and buy-to-cover in the last hour.
3.Stocks decline faster than they rise.
4.If shorted above the 50 DMA, the stock will bounce with lower highs off the 50DMA with lower volume due to cost averaging down effects of buyers.
5.Less reward when shorting below the 50 DMA and the 200 DMA.
6.Shorts perform poorly during June, holidays, and with light volume due to short squeezes.
7.Short stock opportunities are found when the stock doesn't participate in a market rally (relative weakness).
8.If you are short on a stock at the end of the business day before it goes ex-dividend, you pay the dividend (your account is credited) on the payable date.
9.Buy to cover during consolidations.