3 Shorting Strategies Using Technical Analysis

Just like when we purchase stocks on strength, we can sell stocks short on weakness. There are many different ways to find opportunities for a good short, and especially when using technical analysis the possibilities are endless. This post will explain three simple strategies using a recent chart of Sears Holdings Corp (SHLD) as example.


(Note: You can ignor the RSI and MACD boxes when analyzing the chart. I added them simply for visual reference and examination relative to the points addressed below. A further explanation of shorting stocks can be found here.)

  1. The stock falls below its 50 day moving averageMoving Averages are very important to a stock on both the support and resistance side of the equation. In this particular case Sears Holdings sold through its 50 day moving average on a gap down and heavy volume distribution day. When taking a short position on a gap down day you place your stop limit to cover just above the high of that day. So, as we could see at the end of June the stock got close to breaking back above its 50 day moving average and above the gap down highs, but couldn’t make it happen. This is a big sign of weakness and leads us into our second short possibility point.
  2. The stock falls below its 200 day moving average – This is even an easier short point than the first due to the lack of really extensive price volatility on the day. The day was a heavy distribution day as you can see by the volume and really meant bad news for the stock long term. A stop a few 1% points above the 200 day would have been sufficient if it came to covering. 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 setup a short term flag like Sears Holdings did here. You can see that the stock had its big gap down day and then followed it the next day by hitting fresh new lows. The stock then moved up which claimed this new low as a short point with a high volume break. Point three was that high volume break to new lows and a new short entry. Stops to cover could have been placed at $158 with easy comfort.

Moving averages combined with simple volume interpretation are probably the easiest forms of technical analysis to imply when looking for short points or even buy points. I am an avid believer of keeping things simple, and this definitely is case and point. For the more sophisticated trader, using the MACD and RSI could have yielded a few short points as well.

Last point I want to make here which I hope you took note of is that you should always cover your positions with stop orders to act like insurance. This is even more true with shorting because there is no limit on how much you can lose on your short position. A stock can only go to $0 for you to make 100% return on a short, but the upside price potential is always limitless.

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