Short Strategy July 24, 2006

Rob Hanna offers up some advice on choosing short candidates and entry points:

I’ve received several questions about shorting lately. Specifically, what types of things do I look for in a short candidate and what types of patterns do I like to trade? In general I typically look for stocks with low Relative Strength and Earnings Ratings. I like to see growth significantly slowing or the company to be in the red for an ideal short candidate. I then look to trade them as they break down from consolidation patterns. Patterns like inverse cup & handles, flat bases, and head & shoulders.

The current market is a bit tricky for trading breakdowns, though. Volatility is high and trading has been whippy. Breakouts and breakdowns are both capable of being whipsawed in a choppy, uncertain, environment. In an environment like this, therefore, I am more apt to focus on pullbacks. This allows me to keep my stops tighter and better control risk.

Read the rest.

Surviving the Bear July 17, 2006

Rob Hanna gives advice on how best to survive in the bear market environment, and describes some important differences in how a bull and bear market behave:

Bear market environments do not act as mirror images of bull market environments. Turning a graph of a bull market upside down is typically not a good representation of how a bear market will act. This is because they rule by different emotions. Bull markets rule by greed. Bear markets rule with fear.

Fear is more powerful and causes sharper reactions. It is also pervasive. It is not only what causes the market to trend lower, but it is also the emotion that rules the rallies. Rallies in bear market environments are especially fierce. People who are short become afraid of losing all their profits and are forced to cover as the market begins to bounce. Additionally bottom pickers rush in for fear of missing the bottom. Many times these rallies are sharp enough to temporarily take out resistance levels in stocks and indices. This tends to fool many investors and technicians. To profit in an environment that is susceptible to such sharp, short-covering rallies, traders need to be willing to shorten their time frames and take profits more readily.

Live to Trade Another Day July 14, 2006

Valuable advice from Deron Wagner this morning (emphasis mine – BMB):

Our reversion back to a negative short-term bias has certainly been confirmed by the price action of the past several days. Our bearish intermediate-term bias that we assumed in late May never changed, despite the late June bounce. There will occasionally be upside retracements, sometimes fast and furious, within the context of the current downtrend, but there is nothing to indicate the selling is finished or that stocks have found a market bottom. It is crucial that you are vigilant with regard to cutting losses on any long positions that fall more than 7 or 8% below your entry price. Failure to stick with a plan of protective stops could easily result in the rapid disappearance of your trading capital when downside momentum is so strong. Live to trade another day by maintaining discipline to cut your losses. Better yet, follow the trend of the market and profit instead.

Divine Intervention? July 4, 2006

From “The New Market Wizards” by Jack Schwager, in an interview with Mark Ritchie:

How do you decide when a position is too large?

I have a rule that whenever I’m still thinking about my position when I lay my head on my pillow at night, I begin liquidation the next morning. I’m hesitant to say this because it could be misconstrued: You know that I’m a praying person. If I find myself praying about a position at any time, I liquidate it immediately. That’s a sure sign of disaster. God is not a market manipulator. I knew a trader once who thought he was. He went broke – the trader, I mean.