What to short now and how DIY?

        

Earning Channel

 

Expecting an overdue correction, many people parked their money in cash. However, many still have their money in mutual funds, index funds, or ETFs. Most do not equip themselves with the skills or mental strength necessary to earn from short selling when opportunities present.

For ordinary investors, we do not recommend jumping into short-selling, once the market crashes, as shorting a sky-falling stock is even more dangerous than chasing a sky-rocketing stock.

There are always good targets and proper timing to short. To become a long-term winner in shorting, you should stick to the same basic principles as buy-and-hold:

  • – Find stocks of which the price movements match the growth/decline of their fundamentals.
  • – Use the channel to find the optimal timing to trade, and also to protect your trade.

In other words:

Targets:

For buying: when the stock is undervalued and the value is going up.

For short-selling: when the stock is overvalued and the value is going down.

Action:

Act in accordance to channel trading.

Let’s look at some targets.

Ashely Moor recommended “3 Top Stocks to Short Before 2017” in December 2016.

http://moneymorning.com/2016/12/12/3-top-stocks-to-short-before-2017/

We learned that the fundamentals of Valeant Pharmaceuticals (VRX) and Sears Holding (SHLD) looked very bad.

However, one has to be more careful in shorting than in longing.

To build up a long position, when a stock has gained a lot, you will do it with care. Please refer to “What to buy now? How about Coca-Cola?” if you are interested in building up a long position.

Similarly, when a stock has dropped a lot and you want to short this stock, you need to be very careful. You can’t just assume the company is going to die and jump in and short.

If you short-sold a stock at the price of $0.3 and it bounced back to $0.9, before it crashed to $0.01 or 0, how much would it cost you? Could you sustain? In real life, the volatility or distortion could be must worse.

“Back in 2014 CYNK Technology Corp, a worthless “social media” company surged from 0.06 to $22 (36,000% gain) before finally being halted by the SEC.”

http://pennystockwhizzkid.com/can-you-make-money-short-selling-penny-stocks/

Valeant has dropped to 3% from the highest since 2009, and Sears to 8%. Valeant was $15.33 and Sears $8.74 in 2017/1/17. From 3%, it seems not much left, but from $15.33 there is probably some room left to fall. But how to gain profit while protection yourself from getting hurt?

In this article, we will discuss how to find candidates to short by yourself, and how to make a profit from short selling with proper protection, also by yourself.

First follow principle one:

Use Earning Channel to find stocks with long monthly down-channels. When the monthly chart forms a down channel and lasts for a period of time, it reflects that the company has not been doing well for years.

Using Earning Channel, if we select 60-month down-channel, we can find 182 of stocks or ETFs that have formed down channels in their monthly charts with at least 60 months (in 2017/1/17). You can quickly go through each of them to see the shapes of the stocks. Or you can reduce the number of candidates by adding some criteria.

If we put in one simple criterion – that lost money in the most recent quarter – ESP(Q)mrq < -0.1, then the number of candidates is reduced to 23.

We can scan through the charts and select those with better channel shapes – those with higher regularity in the waveforms and with more peaks and dips touching the walls of the channels.

The second step is to look at the price and % of the drop to see how much room left.

The third step is to double check the fundamentals. Avoid surprises for short selling. Check recent reports and articles to confirm if the fundamental is really bad.

Now we have fewer candidates.

Let’s work on when and how to place orders to have better returns and smaller risks.

Since we used monthly chart to select targets, the timing to short is when the price reaches the monthly short-selling-point. That is when the monthly chart formed a down channel, the price bounded up to the upper wall of the channel, and then dropped back into the channel and meets the channel short sell line.

To confirm the monthly short-sell-point, the daily channel has to be in either one of the conditions:

  1. The daily channel forms a short down-channel. A channel is defined as having at least two peaks and two dips. The second dip of a down-channel confirms both the forming of a daily down-channel and the bouncing back from the monthly channel’s upper wall. The optimal timing to short is when the daily down-channel reaches its channel short-sell-point.
  2. There may be times when the daily channel does not form a down-channel, instead, it forms a narrow flat channel. In this case, you wait for the breaking down of the flat channel. The breaking down should be strong enough for the price to reach the break-down line of the daily flat channel, and to touch the monthly short-sell-line.

Now, let’s check an actual case, by selecting from one of the 23 candidates above.

General Cable Corporation (BGC) at 1/17:

Price = 19.45, P/E= -24.73, ROE= -10.4, EPSmrq = -0.29, EPSttm = -0.75, D/E (debt/equity) = 336.

The fundamentals look bad enough.

Let’s check the charts.

The price dropped from $48.96 in May 2011 to $6.22 in February 2016. The price is now at the upper wall of the monthly channel. If we look further, the price was down from 84.95 since 2008. Also notice, unlike most other stocks, the bouncing up in 2009 was not able to reverse the monthly down-channel for BGC.

The daily chart forms a rounded top or a flat but slightly downward channel. If the daily channel breaks then it is a signal that the rally from $6.22 up to 20.80 ends.   The price movement will then be more likely to continue the track of monthly down channel.

Wait for the confirmation of the daily channel signal to short. Protect your short with stop loss (+8% of your short price) and channel break-up line.

In the action plan of Earning Channel, the default value of the break-down line for the daily channel is $17.65, the value of the monthly short-sell-point is $16.32. These two numbers give you good clues of the timing to short. You can use either one to take action. You may want to adjust the monthly short sell line up a bit to make early action by moving the short sell line with your finger. Or, you may adjust the break-down line for a stronger confirmation.

You may want to set up a channel break-up line to protect your short-sell. In the example, we adjusted the channel break-up-line to $23.43 to cover the loss. Notice that, in this example, we take 23% of risk instead of 8% to give ourselves a bigger buffer but bigger risk as well.

You may want to set up a channel break-up line to protect your short-sell. In the example, we adjusted the channel break-up-line to $23.43 to cover the loss. Notice that, in this example, we take 23% of risk instead of 8% to give ourselves a bigger buffer but bigger risk as well.

The Earning Channel software, as well as the articles, tutorials and suggestions in the website and social media, are provided as tools and references to help users develop their own market analyses and make their own investment decisions. Users are ultimately responsible for the way in which they use this information to invest in the stock market. Nothing associated with the Earning Channel or the information presented in articles and tutorials should be interpreted as direct advice on buying or selling of securities.