ENTRY TECHNIQUES FOR SHORTING

Every so often I like to remind myself of an old saying: “If you always do what you’ve always done, you’ll always get what you’ve always got.”

To do better, you must change what you are doing wrong and learn to step outside of your comfort zone. Keep in mind that fully half of every profit you make comes from your entry point. You certainly don’t want to be told by anyone that you made a lousy entry into a position. Don’t worry, you’ll know, and you’ll wind up getting what you have coming. The entry tech-niques for shorting used in this method will help stop a lot of the frustrations you have probably had immediately following your entry into short positions in the past.

The entry techniques I use for shorting stocks vary slightly from my entry techniques for going long. However, unlike going long, in which a trader can buy a stock on either an up tick or a down tick, at the time of the writing of this book, when shorting a stock, a trader is not allowed to go short on a down tick when trading equities. If you trade commodities or options, then this matter is not a concern for you, as you can get short on either an up tick or a down tick. As a result of the up-tick rule, situations may arise in which a stock sets up nicely for a shorting

opportu-retail traders or investors do not use married puts, it is impera-tive for you not to chase stocks down. A high percentage of stocks that break down will attempt to retest their initial breakdown level before the move down can begin in earnest. The subse-quent failure of that retest provides the best opportunity for a person to enter a short trade. As you learned in Chapter 3, one-third of your Netto Number is derived from the formation of the chart. Stocks that have broken down, retested their breakdown points, and have started moving lower again receive the highest Netto Number as a prospective short candidate, as they offer the best chance to profit when shorting a stock.

The paragraphs that follow will take the same technical indicators used in the One Shot – One Kill Method to go long, and demonstrate how to use them to go short. When using the One Shot – One Kill Method, these indicators are not intended to be used individually, nor should they be. Rather they should be used in collaboration with each other, to confirm that getting short is, in fact, the right thing to do.

Chart 6.10 illustrates the Nasdaq 100 during the month of February 2001.

The market had begun moving at a nice run after the Fed-eral Reserve announced a surprise interest rate cut on the sec-ond trading day in January. The heavily oversold tech sector managed to mount a nice oversold rally, which brought it up through some significant resistance points. Traders who were looking to go short on the oversold rally might have missed out on the January up move, but they were finally rewarded for their patience before February was complete. Chart 6.10 shows that the Nasdaq 100 was coming into some significant Fibonacci resistance areas that would truly test the legs of the then-cur-rent rally. The market struggled to make it past those areas and began to weaken near the end of the month.

During this time, many traders were asking themselves whether or not the market was going to head back down and retest its lows. In taking a good look at the indicators discussed in Chapter 2, you could have determined that the chances of it heading back down to retest its lows appeared to be the probable scenario, as Chart 6.11 demonstrates.

150 Phase I: Basic Trading Tactics

CHART 6.10 A classic One Shot – One Kill short entry occurs in the case of the Nasdaq 100 when an oversold mar- ket rallies back into Fibonacci resistance and shows short-term overbought signals. This sets up the dynamics for a low-risk short entry to play to the downside.

CHART 6.11 The most important part of the One Shot – One Kill method is to create solid price levels from which to work. When a number of Fibonacci Friends line up in the same area, the results can be powerful.

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side. The Vertical Horizontal Filter, which gauges the strength of a trend, also began to look weaker, giving further insight that the January rally was losing some of its legs. On a longer-term chart, the Nasdaq had not managed to take out December’s high and was starting to set up from a pullback from the lows’ sce-nario. The short play had begun to set itself up perfectly. That was the time to get into the trade, not the time for brow picking and second-guessing. Trust yourself fully with the method and you will begin to relish these situations, not get anxious.

On February 2, 2001 QQQ, an exchange traded fund repre-senting 100 stocks traded on the Nasdaq, took out the low from January 31, which gave the signal to go short on the market. My reaction was to immediately set a disaster stop above the Janu-ary high for half of my position, and set another stop above the 15-period simple moving average, which stood at 66 ¹⁄4, for the other half. The market tried to rally from that day but did not stop me out. The next day, after moving higher, the market suc-cumbed to the weakness that my technical arsenal had been predicting. I watched the market move lower and lower over the course of the next two weeks. I used my price targets to let me know that the market was reaching a point to take logical prof-its, while I used the 15-day MA to add to my short-term position whenever the market pulled back.

Chapter 12 will walk you through a short trade and all the processes involved in making one. This chapter provides an overview of the dynamics of initiating a short position. Chapter 9, showing how to enter a trade, will provide a more thorough and precise explanation of short trading, including anecdotes.

that repeat themselves. This acuity allows a good trader to profit over and over again. Being able to recognize and attack these situations is part of a strategy to creating wealth, without undue risk, that will help achieve your goals faster.

To summarize; while Chapter 9 will go into more details on the exact entry techniques to be used; entering short positions on stocks requires the benefit of an up tick. However, with that said, the classic One Shot – One Kill entry for shorting occurs after a stock has broken down from major support, rallied back to that support, and failed to advance past that point. From there, the stock takes out the low of the previous bar. That is the ideal spot on the chart, assuming there is a favorable risk-to-reward ratio to be had, for entering a trade with a short position.