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.
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