Will the stock market bull continue or is the end here? The current volatility has many stock market investors very concerned. The way I look at it is that for active investors it really doesn’t matter.
The reason being is that profits can be made on both the long and short side of the stock market. Going long or short is really two sides of the same coin. Savvy investors welcome the volatility and the ability to profit from the short side of the stock market.
However, many investors don’t know how to best identify the ideal candidates to short. While there are many methods, one tactic that I discovered is a simple three step process to screen for short candidates
Some Technical Analysts see a clear tight head & shoulders topping formation on the daily DJIA chart. Others are excited about the lack of movement over the last several days as this could indicated price exhaustion. Regardless of the different analyst’s interpretations, the consensus is clear that stocks are due for a pull back. The question is how steep and when will it occur. No one knows exactly what the parameters of the pull back will be or even when it will occur.
The best short term stock traders can do is to locate shares possessing the best odds of a short term pull back to sell short. Our experience has indicated that companies showing strength, yet still under their 200 day Simple Moving Average make the best short candidates. We further drilled down into this basic concept resulting in an easy to use 3 step system for locating these ready to drop companies.
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 likely 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 flies in the face of conventional wisdom of selling stocks as they fall further. However, our experience has clearly shown 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
Check the fundamentals of the stocks passing the first 2 step. Look for weakness fundamentally to discover the ideal short candidates.
Remember, it’s the combination of technical and weak fundamentals that make the ideal short picks. Using just one analysis or the other can result in you making decisions based on limited information.
