Many traders forget that a trade can be on the long side or the short side. During periods like the one we are in know, most traders only trade on the long side and forget about the potential on the short side. The opposite happens during bear markets. Most traders are shorting stocks and fail to realize the possibilities on the long side during bearish times.
Remember, the stock market has an inherent upward drift. In other words, the market is biased over time to climb higher. Therefore, trying to locate stocks ready to plunge can arguably be more difficult than locating stocks ready to move upward.
The best pure technical analysis system I have discovered to find stocks ready to plunge lower was first made public by Larry Connors of the research firm CG3.
CG3 ran extensive tests on this system over all types of market conditions. It proved to firmly place the odds in the investors favor over a series of trades.
Note, I did not say for every trade. Due to the uncertain nature of the stock market, even the best systems only provide an edge over a trade series. This is critical to understand when trading technical analysis systems. The best part of this short trading systems is thatunderstanding technical indicators is not needed for it to earn profits.
Here’s the three step system to locate stocks for shorting:
The first and most critical step is to only look at stocks trading below their 200 day Simple Moving Average. This assures that the stock isn’t in a long term uptrend that may continue.
The second step is to drill deeper into the list locating stocks that have climbed 5 or more days in a row, experienced 5 plus consecutive higher highs, or are up 10% or more. Yes, you heard me right, stocks that are climbing. I know this doesn’t seem to make initial sense. However, studies have clearly proven that stocks are more likely to fall in value after a period of up days than after a period of down days.
The third and final step is a blend of screening the list down even further by looking for names whose 2 Period RSI (RSI)2 is greater than 97.
Following these three steps to find stocks to short can be made even more accurate over time by using fundamental analysis. Look to see if there are pending happenings that will help push shares lower
