Bear
Hug
This dynamic bull market has taught painful lessons to
those seeking profit from a stock’s decline. Many experienced traders now avoid the
art of short selling completely and stick to popular momentum strategies. But well-rounded
technicians miss out on high profit opportunities by avoiding clear setups that flag
imminent declines. Take the plunge and overcome the bull by aligning your short sales to
low risk market conditions.
Ironically, the completion of a short squeeze generates
excellent conditions for short sales. As upside momentum ebbs, supply-demand imbalance
shifts to the sell side and market players reverse the short-term trend. Using Fibonacci
retracement, traders can measure a squeeze better than the insiders. This forced rally
can't carry beyond 62% of the prior fall without real buyers. They often get washed out
well before the squeeze ends.
Don’t chase a rapid decline with a market order.
Without any up ticks, you’ll get crushed on a bounce just after getting filled. In
fact, avoid short sales completely during dramatic falls. When chasing momentum, safe
exits vanish and risk escalates dramatically.
The first rally into a sharp down gap provides a
near-perfect short entry point. When the gap marks a breakdown from a topping zone, search
for a stop gun low (doji or hammer) somewhere near the bottom of that pattern. This low
bar flags where price will likely fail. But watch out. Price sometimes gaps back in the
opposite direction. In that case, trades must be exited immediately as the prior signal is
negated.
Another interesting short sale may arise when price
constricts into a very tight range and volatility falls off. Positions can be taken within
this quiet zone while random up ticks allow easy entry. If the trade works, price will
quickly expand lower. Should price step out of congestion against your position, exit
quickly. When other factors support a decline, this trade has an excellent reward: risk
profile. Even with no cross-verification, you’ll know immediately when
the trade fails and can cut your losses economically.
Remember the decade-long secular bull and its natural
upward bias. This reduces the odds your short sale will be profitable. Rallies during weak
market conditions offer the best environment for short selling. However, the smart trader
can always locate weak stocks that no bull market can help. Concentrate on these before
tackling the more difficult task of trading intermediate corrections in up trending
issues.
