Chief Investment Strategist
NorAm Asset Management
As we continue to stroll down the path of what is not obvious in this market let’s address how to scale into a short trade.
When you scale into a bullish position you do so by buying into strength and adding at critical support. I discussed this at length in yesterday’s newsletter. If you’d like a copy email me and I’ll send it to you.
Scaling into a bearish trade is different. You want to build your short position as your stock rallies into lines of resistance. The same lines that used to be support in an up trending stock are now places to start your short position. When your stock hits the underbelly of the 34, 21 or 8 period exponential moving average this is where you’d begin. A key to this is looking for low volume. If your stock is hitting these averages in low volume it’s more often than not the sweet spot for your bearish position. I also like to initiate short positions after a stock breaks the 50-day simple moving average and then rallies up to the 50-day on low volume.
You should use small size – relief rallies can be brutal so cutting down to a half–size position is appropriate. You only develop short candidates off the charts – the fundamentals do not matter. Corrections take down the best of companies. If you’re using options – take a longer perspective – allow the short to develop, use options with a delta of 70 and always be cognizant of earnings. Earnings will derail the best shorting candidates.
When should you cover? Take profits when you reach prior levels of support, hit price extensions or when the trade goes against you. Know you’re uncle point and keep losses to minimum.
Practically speaking the trade is over when you cross back over the 10-week simple moving average, the 50-day moving average or have two closes above the 21-period exponential moving.
What’s the easiest trade of all with the least amount of risk when you’re bearish? The call credit spread. We sell specific puts at specific time intervals to make our clients money in markets like this one. If you’d like to know more shoot me an email.
If all of this is too much then sit on the sidelines and wait for the trend take a more bullish tone.
One quick note – I’ll be writing about a number of commodity trades that are setting up in tomorrow’s newsletter.
If you need help with your investing please let us know – we can help you navigate these choppy markets. Email me at Tim.Reazor@NorAmAsset.com to set an appointment – either in person or online.
I talk stocks and markets most days on twitter – follow me by searching for my handle – @TJReazor