10:00 11:00 12:00 13:00 14:00 15:00 10/6/00Momentum Short Entries: Tanking on Open
Much as with momentum long plays, we tend to avoid these, but, you should be aware of them as one style of shortingthat some traders like (Why do | tend to avoid these? | want a reason other than “the crowd is selling it here" to enter ashott, eg losing a 2-day support level lets me know where to put a cover stop loss more easily
Momentum shorts are more difficult than longs, since you need an uptick to short into. The time to do this is on a“pause", when the initial rush of sellers is taking @ breather and the stock is waiting before selling off some more. In theATHM example below, this pause was at 11 1/3 Do you see it below? We missed the 12 to 11 tank, but getting onboardwith the 17 1/8 to 10 3/8 was a bit easier.
[aTHM a] inevaichat =] PV @iSlea) 4) Safir | EGR
ATHM Short: Selling from the
open, no buyers in sight. aAfter an initial pause at 9:40, 1178ATHM kept selling down from 11 11314‘3/4 to 11 1/8, paused for a bit 1158longer, then kept selling of to 1142around 10 support. As with 41398longs, you look to find reversals 4448near decade numbers, eg 10 20 1111830 ete. "110 718
 
th
i 10 3/41B A tal \ 38Quick self-test’ whare 1s the vlc oT 10172micro-resistance level from the fy 10 38timeframe of 11am til 3 pm at? iw ha
Copyright 2000 Data Broa:
 
fveume
200K
150KAnswer, microresistance at 10 100K3/4 .. notice it couldnt break
gver that point though it tested i oll bi dha dl vacthaLecthdd Al Lill °°
sitimesielwing) el day: 10:00 14:00 = 12:00 43:00 © 14:00 45:00 1076/00
 
VERT Short Here's a more pert] [rewalchar =] adramatic example. VERT VERT Interval Cart PV aloes! 5 Ji
opened up right under 30 and
 
sold of all the way down to 22 or! ion 20 112282? 112There were three gaod short BF
entry signals to watch for here
41) t couldn't make @ high abovethe opening price near 9°30-9-48
2) It was right under 30 decade
resistance, a great place to 23112
a ay wiemh ty 22
3) A second shor opportunity woh 2112
cam when it bounced et 10am
24
and kept going down fram there -espyigh 000 st Eresdeaing Co,
PataWeld look to caver somewhere ‘tooKbefore 20 support leval, in thiscase we gat strong support all 50.0day long at around 21 ii Li i Wl di | i1/2 ..scalps off this support level . ha, mt To i lilwould be ok too, later in the day. 10:00 11:00 12:00 13:00 14:00 15:00 10/600
Homework Assignment. Okay, now you know what to look for- these are the signals professionals use. You wont find them inanyone else's book or website. Homework: | recommend that you use a chart software package, or website like bigcharts.comwith 5-day charts, for some of the stocks thal you like to trade, and look for similar pattems
Look for these pro shorting pattems in the stocks that you trade. Notice that NONE of these examples tell you to short stocks that,are running up - a common new trader MISTAKE. You want to Sell Weak Stocks and Buy Strong Stocks. Do MOT try to short ashooting star, or buy a falling knife
These pattems are to help you sell weak stocks at the proper time, for highest short profts Good trading!
 and Volume Tracks
® Main Points:
* In psychology, there is a saying that “pastbehavior is the best predictor of tuturebehavior. In the stock rnarket, we say “bearswin, bulls win, pigs become bacon".
When it comes to repeatable pattems, thereare very few, in stock price movements,beyone an initial retest andfallurefbreakthrough of specificsupport/resistance areas.
‘One thing that does tend to repeat and hold isvolume patterns, as in the examples in thislesson. A good example is in the QLGC chartimmediately below, the volurne is heaviest etthe open/close, and thins down from 12:2daily
USING VOLUME TRACKS:
Shorting Skills for Active Traders:
« TA for Shorting #2: More Chart Patterns for Shorting: Volatility
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How do you use this to profit? Buy on similar pattems dayto day, eg retest and bounces, or short newbreakdowns/buy new breakthroughs, particularly when thisvolume propels the stock price through a 2-day high or lowBe a detectlve - look for clues In the stock charts, using allyour technical knowledge from previous DTU lessons andother books out there.
Volatility is important as well - see if stock is exceedingor near it's 2-day tracing range, eg if you know KLAC has a2-3 point trading range and it's already meved 2 1/2 peintsIn one direction on this day, you wouldnt enter in the sarnedirection, unless there's a very (rare) compelling technicalbreakout.
Put the probabilities in your favor - make sure to know yourstocks, the behavior of the traders In It, as meesured byvolume and volatility “tracks in the sand" that the stockleaves for you in the previous trading session.
Repeatabie Early/Late Day High Volume Patterns
Let's lock at several days of QLGC in the chart below here You can see the high valume at the start of each tradingday, right? On the first day below, it was all buy yolure- a great time tu gu lung. Wher this started to reverse, wesaw short entries Note that we didnt “guess a top" on the first day, and we didnt short the last third of the rangedown (from 39-41) on the open of the second day, we instead wail for il to lose the previous day's low, end shorted38 5/8 The second short entry, on the third day, is again when it loses the previous day's low, short 36 &/8
What you want to leam here is how to study the charts like this and see what I'm seeing: that "most of the action"occurs on high yolurne in the first hour or so of the trading day for this stock. This, we know that a short on the thirdday is likely to continue on downwards, given the volume pattem and 2-day low breakdown. Make sense?
Jose llfirteret Chart =] 2) i 2) e523) fT
  
    
shart entries
28
 
     
‘Copyright 2001 Data Broadescting Corp.
 
    
sell volume
 
clarebuy volume
sell volume
 
      
8 8 8 & 88 8 Bs
consolidationvolume
    
00 1100 12:00 13:00 14:00 15:00 10:00 11:00 00 13:00 14:00 15:00 10:00 14; 12:00 13:00 14:00, 15:00316. 3
 
 
 
      
 
 
 
current 7212trading day trading day72Here's another example ta theright (AMGN), that shows us a bi ttegood short entry under the 5, i 71decade 70 support, on the openof the current trading day, under ‘ ( 70 11269 6/8 A d2-day low 70decade short entryWhy? Heavy sell volume on the support lost 912open drags the price down, andour profits go up, as we short the 6969 5/8 on the open, under the 4two-day low, on heavy volume. iy? 68 12ipre‘We look to cover (and possiblyreverse to a long) once sell erevolume starts to lighten up, and acup pattem reversal on heaviervolume starts to form. That's our“cover the short” signal, and accelerated 200Kwe're out at 67 3/4 or so fara selling volumenice 17/8 short profit. oii tha pati 150K100Kyl hnil i | ll | ih, MT13:00 ©1400 15:00 H 12:B01
 
 
EXTR Short: Here's an excerpt
of 3 trading days in EXTR JESTR SJ firieratChan Fey) | fli 92 | asa] PAT
 
 
 
     
 
Let's scan tt far major patterns previous previous current tee
first: trading day trading day trading day | 33.75
23.50
‘Support line at the 21 i: fy 23.25
23.00
Heavy volume sellers on each of 22.78
the two openings shown here 22.50
22.25
We short on the start of the third fh, 22.00
day, as we get our new jow, fr Mest ed 21.75
under the 21 and again under the Aw! ' 2150
0 14 “ 21.28
You see heavy volume on the coveopen of each day, right? hort "
here 2080
20.25
You also see heavy sell volume HK 20.00
on the close of the first day, it rf 1975right? " "49;
g heavy sell volume et 19.50This tells us the market Is in a ante Een eon“sell this stock" mode... 30, we Se dee ,rab two good short entries on re. ays3/8/01 on the way down. 150K
100K
| ( 50.0Kim jh:00 14:00
 
  
 
 
 
Finally, we have CMRC - youcan see the first entry was a bittough to catch, as we want a
ARC) verve hat] | [iy te] Eran] ST |previous agent iestrading day Watling day 18.50
new low, under a whole number,meaning our short entry Is at the15 548.
It corsolidetes for awhile, thensells off on down to 13.5, never
Mtoe vs
18.00
 
once stopping us out.
This is a good short, good formultiple points.
One clue Is the volume, It'smuch higher on the sell side on348/01 than it was on 3/7/01.
Also, you can see CMRC soldonthe open of the previous dayas well, another hint that this isa “stock to shart’.
Copyright 2001 Data Broadcasting Corp.flume.
hi
 
3701
short opportunities
@ Main Points:
« Remember that we use several types cf indicatorsin daytrading: those called "OSCILLATORS" (eqstochastics, futures, $COMPQ) and "TREND"indicators (indivdual intraday 1-rin. candlestickcharts, nas composite, sector charts)
As an “oscillator” type indicator, remember thatstochastics give relatively FAST trade signals andwe use ther, like all oscillators, to indicateREVERSALS and PIVOTS: when to enter a longtrade on a bounce, or when to sell a profitable openposition as it starts to drop
IMPORTANT: Note that using stochastics forshorting stocks that have shown recent strength isONILY for experienced traders. In general we wantto short stocks that are losing key support levelsvs. shorting these stochastic reversal “tops”, whichis more risky. Experienced traders only shoulduse this method, cthers are advised to shortstocks that are losing 2-day support levels usingyour 1-minute candlestick chart pattems.
      
hl thabat
10:00 14:00 12:00 13:00 14:00 15:00
 
Shorting Skills for Active Traders:
« TA for Shorting #3: Using Stochastic Reversals ta identify
16.50
f 16.00j short here
15.50Ply 1500
| 14.50
taheavierthar-usual “ oeselling volume,
13.50higher than previaus
day at same time300K
250K200K450K
400Ktui ==
:00 1200 13:
   
2
 
SI dala
@PREVIOUS NEXT
Back toMODULE 5
«* HOW to READ Stochastics: the only time you payattention to stochastics are when the two lines, %K and %D, are crossing over each other either above 90 on 2downtum, or below 10 on an uptum. So, they've eithergone above 90% and are now headed downwards, havingjust crossed over each cther (lime to sell/short), or havedropped to below 10 and are just now crossing over andheaded back up above 10 (time to cover short/buy long).Drawback to stachastics: more than ether indicators, theymay give false buy/sell signals, since they move relalivelyfast. You can experiment with stochastic settings, | like184 (use 15, slow stochastics, in esignal.com, as below).So, you use thern as a secondary, confirming Indicator inyour trades, along with other things like the $TRINAQ, tirne &sales, level 2 and chart pattern prior to entering or exiting atrade.How to Short Using Intraday 1-Minute Stochastic Reversals
For shorts that you enter early in the session, either 930m open gap shorts ar sharts during the morning's 10-minute reversals, we may get a stochastic crossover early enough to help us, as in the chart below Vvhen you seethe stochastic lines both go up strongly with the stack price and then start to reverse, we can look to enter a short,‘once the stock price has started to head down. Always have a close cover stop loss, no more than 1/4 point.
BYSN Short Loking at thestochastics here, we see theygave us an "overbought" popsignal where the pink line 1s,they are over 90% and crossedover The stock price made atop right after this and headedback down.
You would wait until the stockhas lost a key support level, eg23, and enter the short al say28 3/4 after it's made it's firstpeak. You would watch carefullyto sae if there was support at 28whole number, possible coverthere and reshort once it loses27 3/4... repeat the short untilthe stock price consolidates &stablilizes in a range ta cover
Stochastic pops are used todefine “overbought” conditionsinthe stock price.
Hl ¥] JintevarChat TF)! PP @iSeaal
Stochastics Peaks Right BEFORE) 30Stock starts to. SELL DOWN 29 112
2928 1223827:12
Stochastics paren if evi 26:12
     
What is the key chart pattem we use? Cup breekouts. In the case above, wesee the stock made a “bear cup” from 28 to 29 1/2 and back down to lose 26(short signal nght under 28), a conservative entry.
Experienced traders would short the stochastic reversal pop looking far it tolosa 29, after the first stochastic top, and short at 28 3/4. Both strategiesworked in this example, for +1 gains.
Traders’ Plays - What to look for in stochastic short trades:
© Practice identifying when the stochastics indicate “overbought” (>90%) and “oversold (<10%). Ifyou see too many wiggles up and down past these points, readjust your software til you get cleansignals, eg the %K and %D settings, on a one-minute candlestick intraday chart.
* You look io short the reversals in stochastics that get over 30%, also using whole numberresistance to your advantage, in combination with Level Il, to time your entries.
 
Trader's Pop Quiz: Using thisALTR chart, identify whereyou would enter short trades.Use a piece of paper heldover the chart (slide it fromleft to right) to simulate thetrading day... When do thestochastics indicateoverbought/oversold?
« Where would you firstloak to go shart?
© How would you managethe trade? What orderrouting option are youmost likely to use? Pullup a level Il windaw andlook at the participants onthe inside bid, who & howwould you route asell/short to them?
© VWhere would your cover
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47 112
hy a7\, fel 46 1/2
i) 4645112
A Sharp Increase Nae fh 45methane s JM awe
_iorrective pullback Shorty SEtt signal
? 80.0%60.0%N 40.0%20.0%stop loss be for eachtrade entry? What's thekey supportfrasistancelevels you will use?
In the chart above, note that we have a sharp spike in the stochastic, as with anysudden mave in an indicator, it is prone to ¢ fast reversal. Also, notice thatsometimes the stoch’s can lag and not be as helpful, as in the “late crossover/shortsignal" we have in the second stochastic rise above.
Using Stochastics with Other Indicators: What's Most Important?
Do you get confused by how to use all the indicators tagether in a system, properly? | get many questions on this topic- with so many indicators, how do we judge the relative importance of each in our trade decisions, and how do we usethem as a system? This area will help you, in using stochastics properly
AAPL Open Short: Lost openingprice level of 21 1/2 at 9:45am.Note that it would be very difficultto get an uptick to shart into ifyou waited until the stock startedto break down in this case, Thesolution? Be ready to keephitting your ‘sell/short' buttonrapeatedly until you get anuptick, say 10-15 times, spacedfew seconds apart each time(dont chase though).
Relative importance ofindicators as an oscillator, yougive stochastics secondaryimportance (unless you're ascalper, in which case they'tevery important)... in determiningwhether or not to enter a trade.
The main thing to look at is thechatt pattem, the STRING, thesector indexes, and the lime &sales for your stock.
‘The stochastic and level Il isalways of secondary importance.This does not mean you do notuse it, on the contrary, you wantto see the stochastics reverse tothe downside over 90% for ashort entry if you're shorting atop. You'te looking to have asmany indicators tell you the tradeis a good one as possible, andreact before "the crowd" does.
Ifind you usually do have at leasta couple minutes to get a goodtrade off before the crowdcatches up Part of this 1s myusing 1-minule charts. If you'reusing chart support/resistancepaiterns and time & salescomectly, you do not, contrary towhat some people say, have toomuch noise.
in fact, | depend on having mareinformation, faster, than othertraders, to help me make winningtradas consistently | knew howto mentally filter out nan-important information, so, | likethe 1-minute charts, U
(PL el Jintewachat =] [PIV @ Ses] a]
Bear Cup on the Open Pattern,Short as-soon/as it loses-right| 21 3/4side of cup here
        
 
     
21172(IF you can get anuptick to short intory ~ 7 21 1/421A 20314| ah, hy vat 2012laid a 1 tyts . Ie. 20414Additional Short (scalp)!Copyngtt 2000 Oss Srosdextnagierr hastic “topny” entriesSlow Stochat80.0%60.0%40.0%20.0%Folane200KFast Drop in Stochastic 150KSince Heavy Sell Volume 100Kwe don't expect much of 50.0Ksal ult Te AY9:30 10:00 = 10:30 10/17/00
 
Using Stochastics Like a Professional:
1. Make sure to experiment with your %K/%lD) settings on your 1-minutechert ta get an optimum setting. Different stacks are best traded withdifferent settings at times. My default is 16/5.
2. Practice integrating signals from your stachastics with your chart patternand market indexes, like the $COMPQ and §TRING
3. Be decisive on acting as soon as you get a confirming 10/90 crossoversignal from the stochastics. They move fast, and as an oscillatingindicator your goal as a trader is to use them to rapidly help you fire ofcorrect trades.
4. Be fast to take stop losses when you are wrong, we always advocate 2-3spread stops for daytrading, usually 1/4 to 3/8 point.
5 |use stochastics primarily as exit criteria vs entrance criteria for longs, egwhen the stochastics start to go over 90 then head downwards, | will belixely to sell out a profitable long position and look to enter a short ifit'sright under a kay resistance (eg whole number/decade number) jee)
Practice using stochastics as part of your trade setup. | put them on my largaintraday (1/2-day 9am - 12noon) chart, only. Do not put stochastics, volume andother TA indicators on a lot of small thumbnail charts, it clutters them. Focus inona specific trade by putting the ticker in a large, full-monitor size intraday chart,that has all your technical indicators on it. Good trading with itl 
Sector Shorting: Identifying Weak Stocks in Weak Sectors, Using
lead/follow stocks
You know from previous lessons how importantit is to look at broad market indicators lke theCOMP and TRING, along with sector charts,to identify relative strength and weaknessamong sectors that are diverging each day.
In this lesson, we will look at how you can usethe divergence in sector charts torecognize good short tradingOpportunities, as some sectors are alwaysweaker than others each day.
follow the $GIN (Internets) §SOX (semis)§GHA (hardware) $6SO (software) $GIP(networkers) $IXTC (telecoms) and $RLX(retailers), $IXBT (biotechs), far example
Leam to recognize vanation in chart patternsamong these sector charts. You should use 1-minute 1/2 day close line charts to follow thevarious sectors. At first, choose only 2-3sectors to watch, say the $GIN $S0X and$GSO/
Shorting Skills for Active Traders:
“@PREVIOUS NEXT &®
Back toMCDLULE 5
By variation in chart patterns, | mean look for thefollowing: 2) one sector chart making a faster bear cupthan another chart b) sector chart percentages lower forone sector then another for the trading session se far c)chart pattem weakness and strength, as seen by "howhigh are the bounces compared across sector charts" asthey map out during the morning, from 9:30 on,
After you train yourself to recognize the variation, welook to trade based on relative strength and weakness.You know, of course, to be following the tier 1 "Lead"stocks within each sector, at least 2-3 per sectors (eq§GIN: EBAY YHOO, $GSO: MSFT ADBE $50X: INTC)etc.
We look to short stocks that are in the weakestsectors each morning, in realtime, es we see them beingtraded, Ifthe whole market is pretly much flat (eg sectorcharts within a 1% trading range) but the telecoms $0TCare week, we go look to short stacks in that weak sector,eg WCOM and other telcos
You trade based on what the market is telling you; ifit's saying "there's no buyers in this sector, everyone'sdumping it and rolling their money into another sector” etc,then you can look to short stocks in that sector, during theinitial selling
Sector Shorting: Using Variation in $GIN $SOXand others to ID short sectors
You should have at least 2-3 1-minute 1/2 day close line sector charts open in your trading station so you canfollow the relative strength of the various sectors, as illustrated below.
These sector charts show roughly equal weakness, telling us that it’s a “short any sector’-type day.
Mae = ol | | ea = |x) oe [x] || terval Chart] [$50% >| JInterval Char feore
sGS0
 
Sector Chart Variation
eae x! (EERE
mm - [oj]
 
7) — fear
 
firterwat Chat [GIN
=] Jirservat Chant
 Many days, however, you will see variation among the sector charts, and some will appear weaker than others An exemple isfound below. These are 3 relatively strong charts, nene of which we would short stocks within. Howaver, one sector is Weakerthan the other two: which is it? And Wwhy? (this is important for you to understand)
GIP Interval Jirterval Chat ara] fimerrachan Interval Chart sIXBT Interval Chart
Answer: the {GHA sector is weaker than the other two, as it is just now testing it's high of the day, justnow completing a bull cup, while the other two $GIP and $IMBT sectors made bull cup breakouts muchearlier in the session, at 10:30 Can you see this? What does it tell you?
 
That stocks in the $GHA (hardware, eg DELL, AAPL) sector are weaker than other sectors, and wouldthus be more likely short candidates when the market reverses to the downside Of course, the best daysto short are like those found in the 6 sector charts above, where the broad market is selling off
Go with the overall trend, using sector chart variation to lead the way’, and alert you to the best groups ofstocks to lock for shorting
Sector Percent Change: Watch This!
It's very important that youmake this a reguler part of yourtoolkit: a small quote box thathas only the COMPO and majorsector percentages in it
This gives you a very useful,handy reference for whichsectors are under- and overperforming the COMPQ, andwhat their relative ranking is,minute by minute throughoutthe trading day Powerful - useit
This chart tells us that internetsare the weakest today, down7% (wow), while retailers wereoff 2.3%
 
Lead Stocks within Each Sector Provide an Early IndicatorEBay =] firewvalChat i] Pl v/@
Following the “lead stacks" in eachsector is important, as they get thebulk of the money earlier than othersdo within the sector, and can bethought of as sector-specific futures(almost!), as lead indicators
What this means to you is, you maywatch a lead stack like EBAY orYHOO (tier 1) and trade a tier 2,smaller cap stock like PSFT DCLKRNWE in the same sector, based onwhat the "lead stacks" in the sector aredoing
This is an important trading concept to“gel right” as well. In shorting, we lookfor 2-dey breakdowns after 9:40 as akey eniry point, also after 10am topsare put in and again near 10.30 (wherewe'd cover on down days, or at least,tighten up our trailing stops).
arealtaaW
 
2-Day New Low in the COMPQ = Great Time to Short
OThe trend's your friend, right? sOOMPO Fe] [intervaiChat —] P| V/@/Slesal Safir Ot‘Well, just as we seek to buy 2-daybreakouts to the upside for newlong positions, we alsa look to"
Short stocks when the COMPG is 1 | / ! Ormaking a new 2-day low This oomoccurred right after 10.10 or so on oanthe 2-day chart to the right, on on22001.
oer
After lunchtime choppiness(expected), the market continuedselling down throughout the rest ofthe session.
Food for thought: what would youhave done ifthe COMPQ started to “
head back up through it's two-day ealow in the afternoon session, if you _ ,were trading at that timeframe? 4
es Recor eT
 
Answer. look for jong bounce plays,of course, especially from withinsectors that did nat sell dawn ashard as the others.Module Shorting Skills for Active Traders: “4PREVIOUS NEXTFiveBack toAvoiding Common Shorting Errors & Mistakes MODULE 5®@ Main Points:
© There's several shorting errors that newtraders are prone 1o make thet | want tohow you how to avoid
© As you go through the examples, look for
things that would separate the professsonal
traders from amateurs, both in their use ofproper rigk management and in using thechart patterns.
‘Shorting is primarily for more experiencedtraders, and is nat recommending for firstyear traders to try
This is not to say you should ignoreshorting, it's importart that you eventually
be able to short ae well ac go long, 90 you
are making money on both sades of the
mountains, the vallays, that occur in stock
trading
© Ifyou make mistakes in your tradas, besure to document the chart pattem and‘What wert wrong’
2 point, that'