How and When to Sell Stocks Short

by William J O'Neil

Risk is Always Present
Always remember that all common stocks are speculative and involve substantial risk. You must be willing to take many small losses in order to avoid the risk and possibility of substantially larger losses. Consider it as your fire insurance premium against catastrophic reverses.Bernard Baruch said,"If a speculator is correct half the time, he is hitting a good average. Even being right three or four times out of ten should yield a person a fortune if he has the sense to cut his losses quickly on the ventures where he had been wrong."

Short Selling Checklist
Let's review our short selling principles as a checklist that the aspiring short seller should run through before making hat first short sale:

1. The general market should be in a bear trend, and preferably in a position that is relatively early in the bear trend. Shorting stocks in a bull market does not offer a high probability of success, and shorting stocks very late in a bear period can be dangerous if the market suddenly turns to the upside and begins a new bull phase.

2. Stocks that the would-be short seller has identified as candidates for short sales should be relatively liquid. They should have sufficient daily trading volume so as not to be subject to rapid upward price movement if the stock experiences a sudden rush of buyers that can result in a significant short squeeze. a general rule of one million shares or more traded per day on average is a resonable liquidity requirement.

3. Look to short former leaders from the prior bull cycle. Stocks that offer the best short sale opportunities in a bear market tend to be the very same stocks that lead the prior bull phase and had huge price run-ups during the bull market.

4. Watch for head & shoulds top formation and late stage, wide, loose, improper bases that then fail. These are your optimal short sale chart patterns.

5. Look to short former leaders five to seven months or more after the stock's absolute price peak. Often,the optimal shorting point will occur after the 50-day moving average has crossed below the 200-day moving average, a so-called "black cross," and this may take several months to develop. Once a former leading stock has topped, monitor it closely and be prepared to take action when it signals an optimal shorting point.

6. Set 20-30% profit objectives, and take profits often!

A Loud Warning to the Wise
If stocks have been in a bear market for one-and-a-half to two years or more, and many former leaders from the prior bull cycle have corrected 70-90% or more off their bull market peaks, you may be late to the party if you start trying to short the market at such a late stage. Selling stocks short in the late phases of a bear market can be dangerous, if not outright disastrous. Always exercise extreme caution whenever you decide to sell stocks short, particularly if you have been late in identifying the start of a new bear market and are merely following the crowd when it becomes obvious. In other words, if the stock market has been acting terribly and in a downtrend for some time, and you've just bought this book because you have decided you are now going to sell short and cash in on the action-watch out!

Link:
Selling Strategy
http://www.stockhouse.com/help_technical.asp?subitem=euphoria