Originally Posted by
adam ali
Mike,
Have you (or other CANSLIM users) developed a comparable process for shorting stocks?
Thanks,
Adam
Adam,
I follow William O'Neil's methods described in "How to make Money Selling Stocks Short". The highlights of this method are the following:
- Only sell a prior leading stock, perhaps one you have traded on the upside.
- Short only liquid issues trading more than 1 million shares per day on average. Note you will be selling short often when the market is volatile and illiquid stocks may be to volatile to handle.
- Short only two patterns: head and shoulders or failed late stage base.
- The Proper time to short will often be 2 to 7 months after a topping pattern has shown itself. You can often get away with shorting earlier in the right shoulder region as the price fails the 50-day.
- Wait for 2 to 4 rallies to occur after the top. These are bargain hunting or short covering rallies. These rallies often stall out at the 50-day or 200 day moving average which is where you might take a short position. You are looking for a time when the short takers become worn out after getting their positions run in too many times. The proper time is when you can determine that the short covering rally appears weaker than prior rallies.
- Do not short when breaking to a new low. This is too obvious and where short covering rallies often start.
- Your short entry point should be at least 20% above any prior base low to give you enough room to make a profit.
- Cover your short position when the price breaks a prior low (where the amateurs are piling in short).
- You are not concerned at all about fundamentals as stocks often top when their fundamentals are the strongest.
So how do I make a short watch list? I make note of stocks that are on an extended long watch list that fail the 50-day. If they trade more than 1 million shares per day I move them to an extended short watch list. I regularly visit this list to see if they are setting up properly. When they do I move them to my "ready short watch list". Thus my list requires paying attention a long time before they are set up for a proper short taking point.
The problem of late has been Mr. Market. Central bank liquidity has made short taking problematic. Medium term shorts are mostly not working as every pullback has been met by buying. Determining when this pattern is changing toward an extended correction or bear market is what is needed. I have no idea when this will happen as central banks have changed the nature of the markets. They are probably trapped as no country can afford a return to normal interest rates. Japan is the poster child of this trap. If Japanese treasury rates grew to 4% it would take 100% of tax revenue to service the debt. They will keep treasuries artificially low until the economy fails, as it must.
The market today is looking weaker than it has for a very long time. Leading stocks have been getting smashed. Maybe this is the time to venture short again.
I have not read this book yet but Gil Morales and Chris Kacher are having a new book coming out on the subject of selling stocks short. They generally follow the methods above and the book is listed at Amazon.com.
Mike Scott
Cloverdale, CA
Posting Permissions
Reply With Quote