Why I’m looking for short selling candidates
The market continues to look very sketchy to me.
Over the last few weeks I have been steadily moving to a more and more
conservative allocation. As a quick review why…I don’t like breadth. I don’t
like momentum. I don’t like high oil prices. I don’t like the action of leading
stocks and new breakouts. I don’t like the declining bond market. I don’t like
the fact that the Nasdaq is lagging, and I don’t like recent price and volume
action. The only thing I do like is that the trend remains up…for now.
One method I use to short stocks is to look for companies with poor earnings
numbers and low relative strength and short them as they break down from
consolidation patterns. Typically, when the market is moving higher, these type
of trades are difficult to find. The rising market tends to bring most stocks
along with it and consolidations in downtrends are not that common. This is not
true in the current environment.
The market is split. Both new highs and new lows have been hitting very high
levels. This is unusual when the market is hitting new highs. It is also
considered by many to be a bad sign for the market. Norman Fosback did work on
this concept in developing his High-Low Index. Another interesting study is the
Hindenburg Omen, which shows that large levels of both new highs and new lows
will often precede a significant market decline. (A quick Internet search on
“Hindenburg Omen†should provide plenty of reading material.)
The good thing about this kind of rather unusual type of market activity is that
it makes it much easier to find short candidates than in a typical market
advance. Just run some scans looking for stocks with low relative strength and
low earnings ratings and you should be able to compile a decent list.
The trend remains up. While the bias is long, the short side should not be
ignored. I suggest building a list of candidates in case the market finally
gives way. There are plenty of candidates out there.
Best of luck with your trading,
Rob Hanna
For those who may be looking to expand their
knowledge beyond just market timing, my
Hanna ETF Money Flow System utilizes the VIX in generating trading
signals for spread trades.
Rob Hanna is the principal of a money
management firm located in Massachusetts. He has spent the last several years
developing and refining methods for trading in stocks across multiple time
frames. He selects stocks using both fundamental and technical criteria, and
then trades them using technical analysis techniques.