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"Making Money with Weak Stocks"
What And When To Sell Short
by WIlliam Schmidt, Ph.D. (Columbia University)
Selling a stock short is riskier because our emotions often get us in trouble. It
is a natural instinct to become most bearish and want to sell short just when the market
is reaching an oversold-bottom. Making it even worse, we know that a stock can in
theory go up infinitely. This means there is no limit to how much we could lose if the
stock goes up and up. A third problem is that short selling takes patience.
Mostly stocks go up or sidewise. Declines tend to be compressed into a relatively short
period of time.
Successful short selling, therefore, requires unusually skillful timing as well as skillful stock selection techniques. If you short a stock correctly it will go down immediately and if it rises against you, your loss will be strictly limited. In this way you will overcome the typical emotional difficulties associated with short selling.
Tiger's Power-Stock-Ranker Software automatically finds the stocks each night which have the weakest internal strength. These are readily graphed on your computer by entering the word :"BEARISH". Getting the automatic sell signals on them will tell you whether they are in position to be shorted.
How does one find stocks to load up one's computer with? Our Elite Stock Stock Professional Report lists 100's of stocks each week that show tell-tale heavy distribution and that are cracking below key support levels and moving averages.
Learning how to correctly sell a stock short will add to your profits and keep you from trying to find that "needle-in-a-haystack" stock that will go up in a long bear market. With the DJI having risen all the way from 780 in 1982 to 5700 in 1996, an advance of 700%, it would seem to be only prudent to be prepared for a bear market or two (or three) over the next decade.
The safest way to sell a stock short is to know in advance where you will cover it if it rises against you. With this uppermost in mind, we generally advise traders to place a protective stop 10%-15% above the stock's 50-day moving average. I see no reason for a trader ever to take a loss greater than 15% in a short sale if they place their protective stops in the manner just described.
In successful short selling you will always measure your short sale candidate's potential decline by comparing the risk of its rising against you. You should see a downside potential at least twice that which you are risking. This means avoiding stocks that have already been beaten down to book value. There can always be a take-over rumor when a stock becomes this cheap.
Next, you will want to find a stock that is at its declining 50-day moving average and - most importantly - is showing negative accumulation for the last 50 days. The best time to short such stocks is when they start to fade and fall back down.
Use Tiger's Power-Stock-Ranker Software's automatic sell signals to find good point to sell the stock short. But always keep in mind that you should not let a short-selling loss become more than 15%. The best way to do this is to plot the 50-day moving average (in blue) on your chart and try to avoid selling the stock short when it is much below that declining moving average.
The charts of AMER (America On-Line) and GENZZ (Genzyme '96 warrants) shows how well patiently waiting for high-tech stocks' 50-day moving average to turn down with a weakening and negative Accumulation Index.
Editors note: Our Elite Stock Professional (ESP) Service in June 1996 found literally dozens of high tech stocks that look like those shown below. This is not a good sign for the market at this juncture.
Click this icon to see chart of the 1996 top in America on Line.:
Click to see chart of GENZZ's (Genzyme warrants) top in mid 1996.
TIGER's automatic sell signals work well in stocks that have steadily negative reading from their Accumulation Index. AAPL (Apple) and Micron Technologies (MU), as well as ISSI showed very steady distribution for much of 1995-1996. Just because a stock has fallen a long ways does not preclude falling a long way further.
Click to see chart of
APPLE's steady decline in 1995-1996. .
Click to see chart of
MICRON's top in 1995.
Click to see chart of
ISSI's top in 1995.
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