post for today:
hi all. been busy searching for mutual funds good for the bear mkt.
anyways, this week will be important. looking at the sp500, it will make or break the 200 day ema. if we break through, then i think this downside will accelerate.
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Talk : Market Trends : Befriend the Trend Trading
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To: Thomas Carr (453 )
From: Mike Learner Friday, Aug 14 1998 11:59PM ET
Reply # of 459
Thomas and those who are interested: As for shorting - Basically, you place to sell stock that you do not own yet -- but, you are obligated to purchase at your price any time! Lower prices brings you profit while higher prices create losses. You ought have enough money in your account so your broker can allow you to enter in this transaction. Now, the key is that you only can sell short at uptick (+) meaning there are more buyers than sellers! If stock is going on free fall with down tick (-), you can not sell short, unless buyers show up more than sellers and tick changes to + !!
The danger of shorting is huge; the stock can reverse its trend and go up big time and more it goes up, more losses for being short! Beside demand and supply, this is the another factor on dynamic forces behind stocks movements.
I personally like to buy deep put instead of shorting. Just like deep calls, my losses will be limited to the maximum of the put premium and time is on my side -- market big fluctuation can not stopped me out as easily as selling short stock outright! If I may input on your transaction on AOL lately, you may see that AOL purchase easily was stopped out since this market and this stock both play big time in either direction! Therefore, a deep call with a buy signal or a deep put with a sell signal allows the stock most likely to behave in the direction that signaled for you (most likely - not all the time) within few weeks! The loss money is the same, however, time is on your side along your judgement, IMO. If the stock reverses its trend either down for calls or up for puts and chart indicate this reversal, you can close your position and recover portion of your premium.
Now, this market is exactly at the support level. Either, we go up next week and retest some resistance level on the uptrend or we break this level and go down to test 8200 + _ and then high 7000 level -- Therefore, we "Befriend the Trend Trading" should be prepared, IMO.
Our method will not work with all big cap companies any more since market has pressed sell button! Our method will only work with selective stocks on very selective sectors that market accepts its growth regardless of what's happening in Asia. However, on the downtrend, sell signals can be our "Befriend the Trend Trading"!!!
We ought to look at it as our capability to perform in either direction -- performance is all the matter, then eventually money comes our way, IMO!
In 1991-1992, Same thing happened with Bio Tect stocks; MRK from high 60 went to 30 in few months! The same thing can happen again. Actually MRK is following that path, seems like!
Through a good and sincere connection on SI, this is what I received and I would like to share it on this thread for educational purposes:
"GBS stands Garry B. Smith. He's the market technician at the Street.com. His approach is pretty easy: short those that broke down on heavy volume. I like it, it works for me. Here's his explanation:
Technician's Take: Short Strategies: Part 1
By Gary B. Smith
Special to TheStreet.com
5/18/98 12:15 AM ET
And the next move for the market will be ... up! Yes, I guarantee it. And you know how I know? Because, people are pleading -- hell, begging -- for my short strategy. Well, okay, they haven't been pleading or begging, but it makes me sound so much more in demand than I actually am. But, many folks have been asking for my shorting method. Okay, many is liberal. Two people have asked me. One, if you throw out my
wife. But, lest you think I'm just being humorous and there are really thousands of readers who embrace the short side, dig this quote from veteran trader and broker Steve Goldman at Yamner & Co.
"I'd say about only 10% of my clients short. Yet within that 10%, about 80% rarely short doing perhaps 1 in 20 trades, if that."
Wow, no wonder everyone is worried about the market hitting a top. If Steve's clients are representative of Everyman, then 90% of you never go short, and those who do still don't do it regularly. But, you know what? I don't blame you for not shorting. One, it's damn tough to get it right. Two, it's dangerous. Three, it's a lot more art than science. Even for a technician.
Nevertheless, shorting is a very important arrow in my quiver. How important? Year to date, I've made more money on the short side than with my longs. I know, in this bull market, that's incredible. But true. And perhaps an even bigger benefit is that by actively looking for shorts, I remain neutral on the market. I then become less concerned with what the market is doing, and more focused on what I'm doing. At the very least it's a psychological backstop, and I avoid the mode of secretly rooting for the market to go up or down.
So, given this long preamble, here's the gospel according to Gar'. Warts and all, no extra charge.
Your first order of business should be to go back in the Technician's Take archives and read my second column ever: A Shorting Nightmare (Sept. 2, 1997). Yeah, the writing isn't as fluid nor melodic as it is now (right), but darn, the points are exactly the same.
1. There must be a major downside break. I define this to be any stock that drops at least 1 point or more. This break can be from either an uptrend or through previous support. On a chart, the break should look ugly. If it made a sound, it'd be like a bad broken leg.
2. Along with the drop, volume should increase significantly. Anything over a 100% rise versus average daily volume qualifies as significant.
3. The stock must close below its 50-day moving average. Why? Because again, you want to pounce on broken stocks, and as much as I avoid the MA's, it's good technical shorthand to see if a stock is, indeed, busted.
The point of all this is that you want a stock that people now hate. As a technician, you shouldn't care why they hate it, only that they do. Look, I love Pepsi. Have friends who work at Frito. But, I'm short the stock. Why? Because no one likes it now. Two months ago, I was long Pepsi. Then everyone loved it. Go figure.
So with these three rules, you have the essence of my short strategy. However, as much as it parallels my long strategy, there are a few differences:
1. You'll notice there's no mention of RS or EPS. Believe me, I wish I had a way to use these screens as I do on the long side. Unfortunately, using the intuitive low RS and EPS doesn't seem to work. Nor does specifically shorting high-RS and -EPS stocks.
In fact, nothing works. For many of you, though, this is good news. Now, you don't have to worry about not getting IBD. Instead you can look for potential shorts with a simple software scan.
2. With my long strategy, I pass on every stock that is greater than 3 points above resistance. With shorts, though, I take every one that looks good. Yes, I know, it's damn scary shorting a stock that is down 20 points from the day before. You'd almost bet that someone is going to see this as a deal and swoop in to buy a million shares just
after you got filled. But, I can tell you, it just doesn't work that way. In fact, what often happens is that some poor yutz does think it's a great opportunity, and does come in to buy at the open. But those buyers dry up rapidly as everyone clamors to get out at the first sign of life.
The fact is, lousy stocks get lousier. People who were surprised their favorite holding is now down big are looking to get out. Shorts bear down (pun intended) and sell the heck out of it. And you? You're just along for the ride, trying to take out a teeny slice for yourself.
The one area, though, I haven't changed is that I still set profit and loss targets as soon as I'm filled. I use the same exact targets as I do on the long side: +2 points profit; -3 points loss. (In this case, the stock would actually have to go up 3 points from my fill for me to be stopped out.) Stocks that are falling fast are extremely volatile, so please keep a tight rein on them.
Now, where do all these candidates come from? For me, they come from the same IBD listing that has the bold-faced stocks, only these are the ones at the bottom of the column. Or barrel, to be more precise. But, as I mentioned earlier, there's nothing sacrosanct about that listing. Any charting package where you can scan for high-volume moves will provide the same list.
Okay, you're ready to start, right? Wrong. I want you inching into this, not running full speed. Besides, as important as gathering the candidates are, the hard part is winnowing out the potential winners from the potential booby traps. Next week, I'll wrap all this up with glorious charts, plenty of gotchas, and some personal GBS losers that are suitable for framing.
Technician's Take: Short Strategies: Part 2
By Gary B. Smith
Special to TheStreet.com
5/25/98 12:15 AM ET
Welcome to Part II of "Shortin' with Smitty"! Or, I guess, "Schmitty" if I really wanted to press the alliteration angle. And judging from this groggy market, you've come not a moment too soon.
In any event, my concluding point last week was that the tough part of shorting wasn't gathering candidates, but figuring out which ones to act on. And here, I have to say it is definitely not straightforward. Unlike my long strategy, in which, after a few screw-ups, you can pretty much guess my longs, the shorts are a lot more art than science. Why? Because the charts are now upside down and you have to be very careful how you draw your support or trend lines. I've been doing this for a few years and I still screw it up regularly.
Therefore, let me give you a few examples of charts that could give you problems.
The first is the dreaded "V" and is illustrated with a chart of MARY. In this case, Bloody Mary. My mistake: I shorted too late. When a stock is already in a downtrend, a big down day could mark a blowoff. Sometimes, it doesn't and the stock plummets further. But why risk it? Here it resumed its downtrend all right, but not until it stopped
me out. The correct entry point on this short was much earlier. That's the one I missed.
Next step up in difficulty is the "iffy" chart. As an example, take a look at Pepsi. Is that a broken trend line or is it broken support? Or is it both? Are there really two support lines? It's very, very tough to figure this one. My call: No matter what, it looked broken, so I shorted PEP (and did end up covering for my two points).
Could you have made an argument the other way? Absolutely, because unlike when I go long, I haven't shorted at a 52-week low. And that means there may be plenty of buyers who view this recent dip as a good time to get on board. The percentages are with me, but this wasn't a slam dunk, particularly because PEP is one of those stocks big institutions love. It might not be a Coke, but it's sure not BOST.
Another recent iffy one was SPLN. The breakdown was solid and it came on heavy volume. And it does look like there's a broken support line. My concern, though, was that similar to MARY, the big down day came after the stock was already in a downtrend. So here we have the situation where there are conflicting signals, with neither being decisive. Of course, given SPLN's recent gains, the odds are it probably will drop further. But why risk it? There are plenty of other better candidates.
Finally, take a look at a real tricky one, FDEF. The chart looks terrific. Huge breakdown from virtually flat support. The down day is the essence of a surprise break -- no one saw this bear coming. So, if you looked at it quickly, you'd say perfect candidate.
Unfortunately, there are a few things wrong with FDEF. One, how much money can you hope to make by shorting this stock? For inexpensive stocks, a 2-point move is fairly healthy. That alone doesn't keep me away, but look at the volatility of FDEF. It moves like a snail. Also, this isn't the most liquid of stocks. Again, that generally doesn't keep me out. However, combine all these factors, and FDEF is a lousy short candidate. I should know: It's still sitting like molasses in my portfolio.
Finally, I'll reveal the shorting nightmare -- the bullet you never saw coming. Last year, it was ACCC. This year, who knows? I hope not to have any, but that's what make shorting so gut-wrenching.
Take a look at ACCC. Perfect setup and was acting well. Until they merged with TCGI. Forget about stops here, because they're worthless when a stock gaps up.
Sure, I covered immediately, but that one trade put a nice little hole in my portfolio. That doesn't scare you? Take out ACCC and imagine if you had been short ENMD prior to blastoff. Now we're talking a nice big hole in your portfolio.
Now that you're shaken up a bit, I'll show you three good shorts, each of which worked out well.
The first one, RXSD, I closed a few weeks ago. It's a textbook case of broken support -- or at least close to textbook case. Notice that even here, the support line wasn't 100% obvious. But, in this case, close enough.
The second example is ETEC, and it shows a bad break in the trend line. Here, the importance of getting in and out with your profit is clear. The day after the breakdown, I went short ETEC and the stock dipped just enough in the next two days for me to get my 2 points and move on. Skill or luck? Who knows? I'm just glad to be out.
Finally, to fully emphasize how much art vs. science there is in shorting, look at the ALNK chart. If you had just looked at SPLN, you'd pass on this one. The drop came at the end of a long downtrend. And, I'd agree with that. On the other hand, the drop also broke long-term support. Yep, see that too. Hmmm, just a big version of SPLN. But that, for me, is the key.
Remember, my view of technical analysis is rooted in psychology. Over a period of five long months, people were used to seeing ALNK trade down to $20.50 and bounce up again. This is a little different than SPLN, where the support line only lasted a few weeks.
No, in this situation, people were comfortable that $20.50 was sacred. All of a sudden that price doesn't hold and people got scared. Mindsets changed. Panic was in the air.
And that's what I felt was happening when I looked at ALNK. Art? Perhaps. More than likely, though, it's just a reflex action upon seeing thousands of charts. You can almost feel the pain the longs were experiencing. Sadistic as it is, that's the time to act.
Okay, you're just about ready to start, but let me alert you to a few annoying things about shorting. You'll have all your ducks lined up. You'll be ready to pull the trigger.
And then you'll find your broker doesn't have the stock for you to borrow. And those are the ones that will go down the most. Or, your broker will have the stock and it will open to nothing but sellers. By the time you get in on an uptick, the stock is already 3 points lower than it opened. You go short and the stock does nothing but go up.
So, you decide to play cute and give your broker a limit order. It works all right -- the stock gaps down, and you're not filled -- only to see it drop another 5 points before the noon bell hits.
Yeah, it's not easy. But despite all these gotchas, I still try to go short as often as I go long. In fact, lately, it's the only game in town. Trust me, I'm no bear, but I certainly want to capitalize on any trend that shows itself. And lately that trend is down.
So remember, draw a straight line, look for the big break and the big volume and then do your Joe Kennedy routine. But paper trade first. Get very comfortable picking out potential winners from losers. That alone will take a good deal of time. How long?
When you can hear the longs scream, then you're ready. Final word of caution: Be careful out there. You are fighting everyone from bargain
hunters, to analysts making upgrades, to takeover firms. All you need is one ENMD or ACCC and shorting can look pretty unenjoyable. Lately, though, I'm glad it's an option."
... It is Friday night and I am drinking my wine while my wife and son are watching a movie; I felt sharing what I have learned with my good SI friends!
Share with me your thought!
Regards,
Mike Learner
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