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Shorting can be the kiss of death for an unsuspecting stock.
I say ‘can’ as this is not always the case. It ‘can’ be for a small or medium ‘capitalised’ stock. In the case of a large blue chip it would take a lot of selling to sink that stock and with the scary memories of shorting only a year or so old, significant shorting is unlikely to go unnoticed. There are considerably fewer Instos that will lend stock today for it to be shorted and this does reduce the capacity to short. So the sheer quantum is no longer there to bring about a mass sell down. The only reason a major company’s stock will fail is if it is seriously going to underperform and Instos sell down as an exiting process.
However there are still stocks within the top 200 which are nevertheless vulnerable. They may not be totally wiped out but they can have their price severely routed.
Let’s look at an example – and my apologies to CRG in advance:
click to enlarge
This is a text book five wave downward impulse pattern. We are seeing a wave four relief rally perhaps coming to and end. It may not be quite over yet but it is close to completion. As the stock rises a little, sellers will come in making it tough for the stock to rise higher. And ultimately the selling pressure will send the stock down to a wave five low.
It is always good to have confirming information that wave four is near completion and/or the stock is vulnerable and a Bollinger Band does this beautifully. What we see above is a stock that is short term overbought and has a high probability of retreating and is thus a good candidate for shorting.
As we like to go long (buy) when a stock is in retreat the reverse is true for shorting – we should aim to ‘sell’ on a day when the stock is firm as that way we can be in the money quickly.
The final point I would like to note is that generally it is prudent to be satisfied in taking profits at the first wave five low as, at that point the sock could receive support and you could find your profits erode quickly – especially as other 'shorters' unwind positions ahead of you.
Perhaps short term there may be some shorting opportunities for those wishing to test their skills.
Enjoy the ride
Tom Scollon
Chief Analyst
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