Selling Short - Candlestick Signals Find Those Opportunities
The Candlestick signals started to show toppiness in the indexes over the last week and a half. This provided an opportunity to start selling short. Selling short is often viewed as something that is a difficult transaction. Fortunately, the online brokerage services make selling short a very simple transaction. They have specific trade buttons that will say "sell Short" usually directly below their "sell" button. Selling short becomes more difficult when trying to work with a full service broker because they have to go through extra steps to complete that transaction. Their compliance department has to check to see if they have that stock in one of the margin accounts of one of their other customers. Remember, when you sign that margin agreement, part of it was to be able to borrow any stock you might have in your account for the purposes of selling short to somebody. Many times your brokerage term will come back and say they cannot short that stock because they do not have it available. A good brokerage firm would go to another firm on the street and borrow it from them. But usually that is too much trouble for them. That is why most brokers like to just buy stock. It is a much easier transaction for them.
However, selling short allows an investor to take advantage of the selling that occurs approximately 50% of the time in the markets. Why not be making money on the downside instead of sitting and waiting in cash until you think the market is turning back up. Selling short to many investors is UnAmerican. It indicates a lack of confidence. But keep in mind that every time you walk into a showroom and order a Cadillac, black with pink interior, which they don't have an inventory and will build one for you, they have shorted you a Cadillac. The same goes on when selling short in the stock market. You are selling stock to somebody that wants to buy it at that price when you think that price will go lower.
Candlestick signals identify when stock markets indexes and/or individual stocks are overbought and ready to turn back down.
The signals work just as effectively on the sell side as they do on the buy side. Take advantage of this information. The purpose of investing is to make money. Not to make money only when the market is going up.
Market Direction - As could be seen in this week's market action, the bearish engulfing pattern of Tuesday started the downward trend in the NASDAQ after a few days of toppy signals. The stochastics on the NASDAQ index indicate that the downward trend may persist for another week or so. Any waffling to the up side would probably be toying with the 50 day moving average. The downside projection could be the 200 day moving average.
The Dow is indicating more strength than the NASDAQ. Longer-term this might be positive in that the money is looking for safe havens as the smaller stocks are pulling back. Another indicator that would indicate that this is just a pullback versus a full-scale reversal is that there are small price stocks that seem to be skyrocketing almost on a daily basis. The analysis of this is an investors are still finding potential huge growth situations in the markets. The economy may not be as bad is what the media and so-called experts would like us to believe. The search for ways for companies to improve profits is still in effect. Technology, as we've seen in the TASR type stocks is still on the forefront of most investors minds. Candlestick signals have identified a good number of the situations, TBUS for example.
If the downtrend is just a slow decline, this will allow the candlestick signals to be that much more effective. That is the type of market for the candlestick signals can point out specifically which industries to short and which industries are receiving attention. A good example was this past week in the REITS. The fear of higher interest rates knocked many of the REIT stocks hard. However, by the end of the week some substantial buy signals had appeared. They could have a very profitable bounce after the overreaction to the downside.