Shorting Stock Strategy

Shorting Stocks Strategy

Shorting a stock is the exact opposite of buying a stock. When you short a stock you are hedging your bets that the stock will go down in price unlike when you buy a stock and believe the price will go up. In order to short a stock you must have a margin account with your brokerage firm. In addition you also have to short individual stocks on an up tick but can short the Exchange Traded Funds (ETF’s) on a down tick. Thus as an investor you have more of an advantage shorting the ETF’s than individual stocks.
Many investors try and short a stock way to early as they believe the stock price is way overvalued. However many times a stock that is overvalued in price may become even more overvalued especially when the stock market is in an extended upward move. The proper time to short a stock is after it has encountered its first strong downward thrust and bounced for a short period of time which sets the stage for a second move to the downside.
Lets look at an example. NTES which made a huge move in 2003 eventually peaked in October of 2003 and then made its first strong downward thrust (points A to B). Notice how NTES then found support near its 200 Day EMA (purple line) and 50% Retracement Level near the $40 level. After finding support near the $40 level NTES then rallied on below normal volume but encountered resistance at its 100 Day EMA (green line) and 38.2% Retracement Level near $48 (point C). This set the stage for a second short opportunity as NTES began to stall out near the $48 level. In this example NTES could have been shorted around the $48 level with a Stop Loss Order placed just above the $50 level just in case NTES broke to the upside instead. During the month of December NTES fell from $48 to $35 a share but did find support just above its 61.8% Retracement Level which was near $34 (point D). Thus investors could have covered their short positions at one of two prices with the first at the 200 Day EMA near $40 and the second near the 61.8% Retracement around the $34.