Let’s talk shorting

We all know how dreadful the PM sector has been and are all licking our chops for a bottom to deploy our cash hoard. All well and good, however I think the bottom will be a long long excruciating process that will not bear fruit for a long time. Therefore in the meantime I am going to start turning the ship towards knocking off some targets in the general SM. Now shorting has been a ticket to the poorhouse for the past 6 years, however I think that is in the midst of changing. In fact, I look at some of these charts and they are the picture of a short sellers dream.

For the landscape to change we will have to see a different dynamic than the current one where the FED speaks from on high and the market performs a hockey stick on cue. I believe that change is in fact in progress. FED credibility is waning, and fast. Sure we will still get the occasional B-Dub roll out when things get desperate, however I think the magic wand days are over.

So here is Plunger’s quick tutorial on playing the dark side:

First a few rules. Let’s identify our prospects using the weekly charts. We want to minimize our risks by not trying to be heroes and earn bragging rights by shorting on the highest price. That’s reckless. We want the market to have beaten down the stock enough to where its ready to sustain a downtrend. We do t hat by only shorting stocks below their declining 30 Week EMA.

Next we like to use the 30 EMA as a tool. It tells a story and we want to listen to that story. The ideal short for me is to have the 30 EMA make a peak then decline, attempt to make another peak and fall short of the previous peak. We then like to see the stochastics turn below 80 and be headed downward. Also it is critical that the 30 EMA is actually declining.

Here are two great examples:

p1 p2

Notice how all the indicators are lined up. OBV and relative strength are below their 30 EMA and the EMA is headed downward.

Here is one that is shaping up, but not quite ready. Note the stochastics are still pointing up so I will give it a bit more time. But we have a nice flat double top in the 30 EMA and its now headed down. Also it has a long way to fall,

p3 p4

Another thing we want to use as a filter is its 5 year history. Why short if we can’t get the big score! So we want something that has had a big run and can make a big fall. Lately I have been touting my short in LNG. When I put it out it was a pretty lonely trade. It was all over the news as Icahn’s baby and was featured on Cramer where he emphasized its long term contracts. One must have to know that this was a puff piece for the sucker crowd. Anyway yesterday Jim Chanos chimed in and he has shorted it. So I am in good company now. Take a look at how far this baby has to fall and listen to Chanos commentary on my post yesterday:

p5

I just love this chart, as its a thing of beauty actually. Sure there may be a bounce here due to the RSI limiting its downside move for now, but beyond that little irritant everything is screaming look out below. And with Icahn’s potential bath in AAPL, do you think there is the potential that he eventually pulls the plug? Another thing is we clearly can see this stock has made its transition from stage 3 to early stage 4. I call this my widows and orphans short.

Another rule is we don’t want to be the hero who finds the one stock in a bullish group that is going to go down. Leave that task for the geniuses. So we want to short within a group with poor RS to the SPX.

Here are some gems to consider:

AXP, FIVE REZ RWR TEX WY JNJ MRK IBM CAT LYB CL LOW HHC INTC KW ROIC

That’s just a few from my stable, now let’s hear yours