In this week’s webinar, we showed members ways they can use MarketSmith to profit (potentially) in a downtrend, by finding stocks to sell short.


In our shop, we emphasize that cash is a position, and it is generally better to step off the tracks and let the train to pass in a downtrending market. Shorting comes with high risk, gains are limited, and once a stock starts going up, it might go up for a long time. Here are some guidelines to follow from How to Make Money in Stocks by our founder, William O'Neil:


Just as we don’t buy stocks because they had an abnormal move down in price, we want to stay away from short selling a stock just because it has made a strong price advance, as these stocks can continue to new highs. Ideally, the best time to short a stock is 3-7 months after the stock has topped.


  • “Never short a stock because it has too high of a P/E.”

We do not put much value in a stock’s P/E, as we have found that it has little value in predicting a price advance or decline.


  • “Keep the limit to 10%-15% of available money.”

Keep your position sizes smaller than usual, as managing your risk can help avoid substantial losses.


Here are some chart examples of patterns to look for on the short side:

Make sure the Relative Strength line has been in a clear downtrend for 20-34 weeks. Remember to look for breaks on high volume and take profits at 20%.


Some things to remember before shorting:



 

If you have not had a chance to watch our webinar, “Finding Stocks to Sell Short,” you can view it by clicking here.


If you have any questions, you can reach us at 800-424-9033 or at reachus@marketsmith.com.


Best returns,


George Orlando

The MarketSmith Team