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When Investors should Short a Stock
Shorting a stock is the exact opposite
of buying a stock. When you short a stock you are
hedging your bets that the stock will go down in price
unlike when you buy a stock and believe the price will
go up.
Many investors try and short a stock way
to early as they believe the stock price is way
overvalued. However many times a stock that is
overvalued in price may become even more overvalued
especially when the stock market is in an extended
upward move. The proper time to
short a stock is after it has encountered its first
major sell off and bounced which sets the stage for a
second stronger move to the downside.
Let's look a specific example form the
Spring of 2003. COKE made a strong run from July of
2002 until January of 2003 and gained nearly 75% over a
6 month period.
After peaking in January COKE then sold
off but found support near its 38.2% Fibonacci
Retracement Level near $59 (point A) and then preceded
to rally over the next few weeks on low volume (point
B).
COKE then ran into strong resistance as
it rallied back to its 61.8% Fibonancci Retracement
Level near $65.50 (point C) calculated from the early
Janaury 2003 high to the low made during the first week
February. This was then followed by an even stronger
sell off in which COKE dropped from $65 to $47 over the
next three weeks (points C to D).
Thus the best time to short a stock is
to wait for it to bounce after it makes its initial sell
off and then try and catch the second stronger move
downward. When looking for
stocks to short make sure they are exhibiting these
three characteristics.
1. The stock has already undergone one
significant move downward after making a top.
2. The stock then finds support at a certain Fibonacci
Retracement Level or Moving Average and rallies on poor
volume.
3. The stock then stalls out near its 38.2%, 50% or
61.8% Fibonacci Retracement Level after rallying.
By following these simple rules
investors will have a much higher success rate when
attempting to short stocks.
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