Original Question: Can you elaborate more on your approach going short when the stock goes for a climax run and when you short weak rallies. Which criteria so you look for in the chart and what stocks do you consider?
I basically follow the approach outlined by Bill O’Neil in his book How to Make Money Selling Stocks Short. Gil Morales co-authored Bill’s book and later wrote his own, which contained many more short selling techniques. However I never really focussed much on those.
The bottom line of the former book is that you only short former leaders after they flashed a major bearish break. Following this short selling mantra helps you stay in sync and only hit the market on the short side when it’s ready. I always monitor former leaders for red flag exits and big price breaks. Once the break is in you can put it on a short sale watchlist if you want. The entry is triggered once price rallies into a major resistance level from below. It is basically a Wyckoff test of resistance. However on the short side things tend to unfold quicker and with a larger magnitude. This is due to the fact that fear is a much stronger emotion than hope or greed. Therefore a retest of resistance has a more jagged appearance compared to a retest of support on the long side. Proper short sale targets also tend to have several weak rallies into or even above key support levels following the break. A weak rally can easily be identified when price is rising on low volume or when the ATR becomes tight below resistance compared to tight trading after it blasted higher through the resistance. The latter would actually be constructive. Quite often those leaders rally in tandem with the broad market so it pays to also watch the indices for weak rallies as well.
Short selling into a climax is a different beast altogether. The idea here is to catch an early short sale entry when you sense that the market overheats after an anything goes phase. In that regard it is paramount to focus on the hottest speculative stocks of the time. I am talking about the ones who are extended 30, 40 or 50% above their 10d MA. The entry can be timed by proactively selling into a century mark or clothesline hit.
And here is an article available for the members of our Stock Ideas Subscription which explains our methodology and our setups, including the short sale setups, in more details: Our Stock Trading Methodology
Here are some related Q&As:
Do you go long a stock covered in a short sale report?
How do you decide when to be fully invested and when to keep some cash?