When the market goes into a bear phase investors can have a difficult time making money on the long side. I have seen stats that say in a bear market 3 out of every 4 stocks go down. As an investor that means that the odds are stacked against you if you’re only buying stocks. In a bear market the longside of the market is difficult to navigate, but on the flip side shorting opportunities become abundant. Many people are scared to short a stock or index in the belief that there is unlimited upside risk, but by applying a buy stop for protection you have almost completely capped your upside. Why almost you ask? There are times when stocks gap up (or down) past your stop price and you can get filled at a much higher (or lower) price from your stop order was placed. These cases are rare but, it is something you need to be aware of.
When looking to enter a short position I look for three things a down-trending market, a negative sector and a stock that has formed a base (consolidation area) near it’s lows, then I wait for a breakdown of that base at which time I would enter my short position. If you missed the breakdown and the stock makes a sharp move downward, then DO NOT chase the stock and short it when it is extended to the downside this would leave you with an extremely risky postion. Rather, wait for a move back up to the breakout point or at least a move back up into a short-term moving average. Then, look to enter your short once it bounces off that area and starts to head back down. Once you place your short position look to place your buy stop (for protection) above a near by resistance area which usually means the most recent high or you could use a moving average, better yet, place your stop above a high and above a moving average, but make sure it’s not too far above where you entered the postion. My personal limit is 10% away from my entry price. Click the example below to see how the strategy works. The initial short and stop is where I initially entered the position from a breakdown of a base and where I initially placed the stop. The secondary stops are where I moved my stops down, once the position moved down, in order to protect my gains. “Covered” is where I exited the position because my buy stop was triggered.
For professional investment advice on this topic contact:
Allgen Financial Services, Inc.
888.6ALLGEN (888) 625-5436