Mad, I agree that especially in current market conditions shorts seem a safer bet. Stocks almost always drop at least twice as fast as they rally, because fear is stronger than greed.
However, I've noticed a lot of your short signals lately are on stocks that are hitting new highs against the market's down trend for the day. This is trickier and usually any pullback is very small, and as you've noticed, sometimes the rally just builds and builds, a combination of people piling into a strong stock in a weak market, followed by all the shorts in a panic to cover what they thought was surely a great short entry.
What I look for foremost in going long is a failure to make a new low. My second strong indicator is a stochastic pivot off a seriously oversold condition. My third strong indicator is when a falling price approaches a near-term (or longer term) support level close to a round number (on the dollar).
An example of failure to make a new low would be MA behavior yesterday and I've attached a chart analysis. The stock gapped down hugely after Thursday's breakdown of the bailout plan. In fact, it opened not too far from 9/18's panic selloff support level of $182. On opening Friday, there was a further selloff to test that support level. Support was broken and very close to $180 (a nice round number that often serves as intraday support and resistance), there was a quick bounce.
Although there were great trading opportunities after the opening bell, I generally don't trade the first 30 minutes of the day, because it's usually a mess. I like time to see a trend set up, to see some candle patterns, to get a feel for the volume and the trend of the market, etc.
So MA bounces off 180, breaks the opening high of 184.50, totally hits its head against a nice round 186, pulls back, re-tests 186 and fails to make a new high (by just a penny). There's a strong short signal right there. For the next two and a half hours the stock ranges between the day's support and resistance, but by 12:15 it is clearly making lower highs and lower lows and s nothing but news of a bailout agreement could possibly drive a true rally. Once the LOD breaks down at 12:45, it drifts down further on very low volume, testing each round number as support along the way - first 180, then close to 179, and finally comes close to 178 before buyers and sellers seem to find equilibrium.
Now, if I'm looking for a strong long entry at this point, I need to see a failure to make a new low, because if a stock hits a low of the day, bounces, pulls back and fails to make a new low, chances are VERY good it will continue the trend up. When MA bounces off 178.28, and pulls back to 179 instead of to 178, that's a great long signal. You could go long just above 179 and set your stop at 178 (because that would be a breakdown of the LOD). Sure enough, from that point MA makes higher lows and higher highs, eventually ending very close to the day's resistance at 186.
If you look at any chart you will see this pattern. And it's just the opposite for shorts: Look for a strong run up, then a pull back, followed by a failure to make a new high. That means the buying pressure has weakened enough that the sellers will gain the edge of their lower bids getting filled.
Seriously, study any chart and watch the uptrend on failure to make a lower low, and the downtrend on failure to make a higher high.
Now one thing that negates all of this is when news hits a stock, a sector, or the market, as we saw on 9/18 when a possible bailout plan was hinted at and the whole world decided to go long, triggering what was probably the second strongest short squeeze of the year after 1/22 :eek:
However, I've noticed a lot of your short signals lately are on stocks that are hitting new highs against the market's down trend for the day. This is trickier and usually any pullback is very small, and as you've noticed, sometimes the rally just builds and builds, a combination of people piling into a strong stock in a weak market, followed by all the shorts in a panic to cover what they thought was surely a great short entry.
What I look for foremost in going long is a failure to make a new low. My second strong indicator is a stochastic pivot off a seriously oversold condition. My third strong indicator is when a falling price approaches a near-term (or longer term) support level close to a round number (on the dollar).
An example of failure to make a new low would be MA behavior yesterday and I've attached a chart analysis. The stock gapped down hugely after Thursday's breakdown of the bailout plan. In fact, it opened not too far from 9/18's panic selloff support level of $182. On opening Friday, there was a further selloff to test that support level. Support was broken and very close to $180 (a nice round number that often serves as intraday support and resistance), there was a quick bounce.
Although there were great trading opportunities after the opening bell, I generally don't trade the first 30 minutes of the day, because it's usually a mess. I like time to see a trend set up, to see some candle patterns, to get a feel for the volume and the trend of the market, etc.
So MA bounces off 180, breaks the opening high of 184.50, totally hits its head against a nice round 186, pulls back, re-tests 186 and fails to make a new high (by just a penny). There's a strong short signal right there. For the next two and a half hours the stock ranges between the day's support and resistance, but by 12:15 it is clearly making lower highs and lower lows and s nothing but news of a bailout agreement could possibly drive a true rally. Once the LOD breaks down at 12:45, it drifts down further on very low volume, testing each round number as support along the way - first 180, then close to 179, and finally comes close to 178 before buyers and sellers seem to find equilibrium.
Now, if I'm looking for a strong long entry at this point, I need to see a failure to make a new low, because if a stock hits a low of the day, bounces, pulls back and fails to make a new low, chances are VERY good it will continue the trend up. When MA bounces off 178.28, and pulls back to 179 instead of to 178, that's a great long signal. You could go long just above 179 and set your stop at 178 (because that would be a breakdown of the LOD). Sure enough, from that point MA makes higher lows and higher highs, eventually ending very close to the day's resistance at 186.
If you look at any chart you will see this pattern. And it's just the opposite for shorts: Look for a strong run up, then a pull back, followed by a failure to make a new high. That means the buying pressure has weakened enough that the sellers will gain the edge of their lower bids getting filled.
Seriously, study any chart and watch the uptrend on failure to make a lower low, and the downtrend on failure to make a higher high.
Now one thing that negates all of this is when news hits a stock, a sector, or the market, as we saw on 9/18 when a possible bailout plan was hinted at and the whole world decided to go long, triggering what was probably the second strongest short squeeze of the year after 1/22 :eek:
