Shorting - My setup.

It's been a while since I've looked at the short side of the market but It's good to review your setups so that we are ready when the time comes.

A lion stalks the weak, and when the moment arises it pounces.  Lions do not go after the strong, they find the frail and go for the kill. 

This setup is for lions. We stalk we find the weak, and when the moment arises we go for the kill.

When:

This setup works best when the broad markets is in stage 3-4. I actually like the quiet that stage 3 provides.  Kills become more difficult when volatility arrives in stage 4, but the bounty can be the biggest.   

This setup is not recommended where broad market is in stage 2. 

How to find. 

URSA MAJOR Scan:

Elements of Ursa Major

• RSI: (Wilders) Monthly < 49--  This was the trick-- too low and the stocks that it the scan produced were not tradable So it's set just inside the bear territory on the monthly 

• Weekly RSI <32  shows recent weakness.   We want weak and getting weaker

• BOP  (Balance of Power) - Quarterly < 0  -- This element tends to find stocks that have the bull back breaker move--  the “Matador Gap.”

• Price >4  We need to make sure there’s still some meat on the bone. 

Wounded Prey  39> 38 --- this gives us stocks trading below its 65 moving average over last 39 days. 

Characteristics of good shorts

I like stocks where there is no ambiguity-- they are in downtrends. They are weak and the longs dread every opening because they see they will lose money.  There are certain characteristics that appear for these stocks.

Characteristic #1

The “Matador Gap”

The matador Gap is gap that kills bulls.  It typically follows a consolidation period in a bullish stock.  It is this type of gap that tells us the stock is getting weak.  We want the stocks that the big money will be divesting itself of over an extended period… the matador gap is usually the first clue that the bulls are dying.  

It tells us big money is getting out of a stock and when big money gets out it 

Examples: HPQ:

GMCR:

WRLD

Element 2: Consolidation or countertrend bounce .

Just because a stock got hit with a matador gap doesn’t mean that we should chase and hit it right away.   A wounded animal is extremely dangerous before it resigns itself to its fate,  stocks are no different. Many times following the initial matter gap there is a severe countertrend move created by short covering.  Late shorts get destroyed. 

DFRG : Great example of a matador gap on earnings— The stock then jumped 18% so shorts that chased got crushed.  Yet this was still a great short candidate, if executed property.  

To avoid this risk of chasing, I want to enter shorts following a countertrend bounce or consolidation period. 

These period and be easily identified on longer term charts. But once candidates are identified, use the daily chart for the landscape. 

WRLD is a rbeautiful example

:

WRLD was somewhat unusual in that it landed another explosive sell off.  More commonly, shorts will “drip” in that they slowly drip down making us big $ in the process.

Some Drippers:

CENX:

LINE: 

Follow the range expansion.  Not a single close over 9 ema for nearly 2 months. 

CSTM-  Here’s a stock been destroyed (down over 50%)  over the prior year. Keep any eye on these type of stocks that put in some rallies because when those rallies fail they are often not trusted and will sell off badly again.  

At right edge of screen big bearish bar following consolidation.

The aftermath?

Entries And Risk Management

Entries: Draw the trend lines following the matter gap

Once Range breaks keep your initial stop at the previous high.  

(Blue lines trend breaks / Red lines corresponding stops. )

The great thing about this setup is that it allows for tight stops, which = big position sizes and big profits. 

Exits

• Initial stop

I don’t care how hot she is —- always use protection

• Trail with a magic line —

 I find the EMA 9 works very well to ride the dripping phase but different stocks play out differently.  Also Trend lines on shorter time frames can also be effective for trailing the position

• Gushers

On a big percentage move following consolidation there will often be a temporary bottom.  This type of move tells you the trade has been won.  Take the kill and wait for a countertrend move or more consolidation.