Just like when we purchase stocks on strength, we can sell short stocks on weakness. There are many different ways to find opportunities for a good short, and especially when using technical analysis the possibilities are endless. Add to that, the markets are considerably extended and could be nearing the end of a long bull market.
Today we will explain three simple strategies that you can use to find and execute short positions.
1.The stock falls below its 50 day moving average - Moving averages are very important to a stock on both the support and resistance side of the equation. In particular when a stock sells through its 50 day moving average on a gap down or heavy volume distribution day. When taking a short position on a gap down day, one can place their stop limit to cover just above the high of that day. A stock that is that weak should not find the strength to trade above that. If it does then many would agree that the location we described above for your stop is the most efficient.
2.The stock falls below its 200 day moving average - This is even an easier short point than the first due to the popularity of this moving average. In this case as well, volume pressure will play a big part in the level of expected weakness. An entry on a close below and a stop a few percentage points above the 200 day is the best suggestion here as there will be many technical traders attracted to this short. 200 day moving averages offer a good place to short on stocks that are coming out of a long term run because they are reliable in terms of importance.
3.The stock trades to fresh lows after huge gap down day - It usually takes a few days for a stock to do this but this setup can be very rewarding to those that are patient. When this happens, as with the above examples, it is wise to see an increase in volume. This lets you know that others are entering the same trade. Stops are tougher on these because the high of the gap down day can be a substantial distance higher. Usually we suggest that traders start with a smaller position and add to it as they see more weakness.
Moving averages combined with simple volume analysis are probably the easiest forms of technical analysis to imply when looking for short points or even buy points. For the more sophisticated trader, using the MACD and/ or RSI can assist with the timing of an entry.
Lastly, the stop location is just a suggestion. When shorting stocks using these three examples, the stop placement is more of an art, and something each trader will find what works best for them.