anew low of the day at around 12:00 is usually a good time to short.Rule #5: It is too dangerous to try and “catch a rising knife" andshort a momentum stock's top.
Okay, fess up - how many of you have been cut trying te catch a bottom far ¢ stockyou think is going to bounce up? Weve all done it Shorting mornenturn stocks isthe same exact thing, in reverse.
Do not aver, repeat ever! try to predict the top of a strong stock that has a lot ofbuyers in it. When demand exceeds supply, price goes up. It is difficult to nail theexact top of stocks that rise, say, 5-10% in 20 minutes on a hot news story
This, unfortunately, is how many traders try to get started with shorting, and theyget burned more often than they correctly quess the top. Ye want to use technicalanalysis, Lil and other indicators to trade, not quessing
Once you understand true market dynamics, you'll realize that you dont want to tryand guess a top for a hot stock. You may get a short off on a wiggle, right beforethe stock expiodes to a new high. Shorts are often "squeezed" here, as everyonerushes to cover their short positions. The market rnakers step off, and the priceruns. These are good opportunities to get long, when 2 new high is made. Do not tryto short momentum stocks unless youte very fast, have very tight scalping-typestops (eg 1/4 point absolute max, 1/4 better). An exception might be if the stack isup a ridiculous amount for the day, say over 80%. eq | nailed the XING top at492%, but those are very rare times 99% of the tirne you'll want to avoid shortingmomentum runners
Rule #6: Use a cover stop loss at the most recent intraday reversal
 
Let's say you short CSCO after it loses 60 support, making a new low for the day. Youget the short off at 69 3/4. It wiggles up a bit to 59 7/8, drops down to 59 1/4, then runsback up to BO, then goes to 60 1/4 and beyond.
What's the proper way to have managed this trade? Your cover stop loss should be a bitcover at the support level that the stock lost that caused you to enter the short in the firstplace, If you shorted because you think 60 was a key support level that was lost, andyour reason for entering the trade is proved wrong, eg they take it back up over the 60,then you'd want to cover night over 60, at 60 1/4 max.
Rule #7: As with all daytrading stocks, makeover 800K volume. Check that brokeries Se ers She ot ere
These should be common sense, but they're worth noting nonetheless. As with allintraday trading you, volume is your insurance, and helps you take your stops quicklyand at a good price Only trade stocks with an average daily volume of over AUO,000shares.
If youte trading a thin stock, you may not get filled til way past your stop, costing youmore than you wanted to spend, in the event that you're wrong about the price direction
A-second note: check with your broker to make sure shares are available to short Youdont want to correctly identify where to short, then try to enter the order and get a“shares not available" message. Also note that all shorts are done in your marginaccount, and thal stocks that are non-marginable are not shortable either (includingunder-§5 stacks)
Okay, let's move on to some chart patterns and examples.Module Shorting Skills for Active Traders: “4PREVIOUS NEXT ®Five E* Open Shorts: The Safest and Best Short Play wenn -@ Main Points:
Shorting stocks that have a large gap up onihe open on news are often profitable. You want10 avoid shorting good eamings release gapsand buyout gaps though.
‘You should look to short overreactions to news{eg gaps up over 15%) on high volume (eg over0K shares premarket) within the first 10minutes or so of the market open.
The other way to short gaps is to short a stockthat makes a small gap down premarket andcontinues selling after the open, eg 1/4-1/2point, end loses a 2-day support level, makingnew lows. (eg ALTR closes et 48 3/4 near thelow of the day, the next day's premarket tradingat 48 1/4, it loses 47 3/4 on the open at 9:30,short it here with a cover stop at 48 and an exittarget of 58 to 112 points etc )
As always, it’s a good idea to place a closeshort cover stop loss right above the exact openprice as well, in case buyers keep coming intothe stock
In general, you want to see a bit of a downtrendon the gap cccurs from where the stock wastrading premarket. For example, if it closed at36 1/2 the night before but gapped to 40 3/4premarket the following day on news of a newcontract being won, then sells down to 39 78 bythe time the market opens at 9:30, you'd want toconsider firing off a short on the open (using acover stop loss at 40 1/8) and an exit target ofroughly 1/3 the retracement, at 36 142.
How to Trade Open Shorts
Here's a perfect example of an open shortplay, for a stock called GALT that gapped upover 30% premarket on Oct. 17th.
The 2-day chert to the right shows the stockclosed at right over 30, and doesnt trade onmuch volume. After a positive news storycame out, the stack gapped up to 43premarket on high volume (over 100K shareshad traded before 9:30am on 10/17).
shorting
oat =| JirtewvalChat =) PV
Open Gap --> 4 =+
Wait for the stock to lase # SHORT 39 3/4
You can also short minor gaps down, as well asmejor gaps up, as follows
Let's say a stock closed at 28... near it's low ofthe day Then the next day it gaps down a bit to27 3/4. You might want to fire off a short at themarket open (9:30-9:35) with a cover stop loss at78108. You might look ta cover it near a 10-daysupport level, or, use a trailing cover stop about4/4 behind where the stock is currently trading et.Do not short major gaps down on the open. Theytend to attract buyers.
You could short @ major gap down stock if it's stillselling off as of 10:15 am or so... just dont try toshort big gap down stock... the “trade potential”is largely gone cn the short side, as people whowere short from earlier will probably look to covertheir shorts (these are the “dead cat bounces”that you can scalp on the long side oftentimes).Take a minute to review IiodiLesson10 and thenext lesson as well, click here, for some basicgap info as well.
Let's look at a few charts here to look atexamples of shorting on the open. Again, dontshort premarket... but, look for short opportunitieswithin the first 5-10 minutes from 9:30-9:40, forthese chart pattems below:
 
-4
 
a key support level, egdecade 40, before --4- COVER36 -| 36-4- 34
a Nha, 32
You do Not short stocks that gap up on babe toate Poe on
good earings, in general, eg MSFTgapped up over 10% and kept going up afterthe open Be selective, and first “wait forthe stock to lose a key support levelbefore shorting it on the open. This is themost important thing to realize about openshorts. You do Not just short it because it'sup 30%, it could run to +42% before topping.Let the chart tell you the story, short onlyafter it loses @ support level
 
ohana
In our Trading the Open live trading room, |acvised traders to “Short GALT if it loses
Cepmitie2000 Dt Erodeatng Corp. | ‘Stow Stochorts
   
40 support, say at 39 3/4" (exact quote). | 40:00 11:00advised tham to cover around 36 or so (fiboretracement). This was a great trade! Hope Oren) Or TAO)
 
 
 
this makes sense 40 (decade number) iswhere | pegged support. It could havereversed above 36, so that’s where wecovered (it's ok that we didnt’ get the fullrange of the short, we're happy to takealmost 4 sticks (points) on a $40 stock!
Let's look at some mare examples.
Ebay had ran up to 60 and consolidatedthe day before here (Oct 17, 2000), right EBAY [interval Chat
before the close It ran up a bit more on the fear E[fieewsichon =] PI IW S/S/es/ 4]open here, consolidated a bit more for the
first hal hour, then losed 60 support (twice, adouble Scttorn)
‘We would have been stopped out for a- 38or so loss the first time, but on our re-short
(2nd time it lost 60), we sre in for a nice winas il dropped to 49, consolidated, and sold
off down to. 55, where we cover, fara +4 3/4win
Note the key when we're wrong, ifil "shakesus out”, like it did the first time, is to keepthe cover stop loss small, say 3/8 to 1/2point max.
This example shows you about breakdownsbelow consolidation (choppy undecided}trading Zonas that last ‘or 5-10 minutesbefore the trend is re-established one way orthe other, on open gaps up.
Here's Oct. 17th KLAC, a semiconductorcompany - notitce we could have got an openshort off at 32 on the open, if we were fast.however | like to wait til it loses a keysupport leval, my favorites are decadenumbers since level 2 tends to get thickerthere, as the market makers have a lot ofsiog buy and sell limit orders there from thepublic investars that they have to fill
‘So, we see 2 bit of consolidation before thedownwards march continues, we fire off ourshort right under 30, at 29 3/4 (with a coversiog at 30). We cover 1/2 the position at 29(trailing stop at 29 1/2) and the balance at 271/2, for another 2 1/4 points win.
 
Remember, you can add to and sell off yourpositions in pieces, a common pro tradingtechnique, eg short 400 at 29 3/4, cover 200at 29, wait and cover the remaining 200 at 271/2 Your trades do not need to be “all ornothing”, rather use dynamic position sizingdepending on the price action to get the bestoverall trade. This is how market makerstrade, you should try it out yourself as well
More Tips & Guidelines on How to Make Winning OPEN SHORT Trades:
Keep these pro techniques in mind for playing open shorts:Keep in mind the reason for the open short (why did they gap it up?). Be more cautiousabout shorting eamings plays than you are about shorting news-tyne plays
Always always keep tight stops on your shorts. Because of the effect of "short squeezes",eg shorts trying to cover in a panic if the price starts to go up, you need to be prepared tocover quickly. Never short without a DAT broker (dont daytrade wo @ DAT broker, for thatmatter). Cover with market buy orders (or SOES limit/SLD).
The higher the open gap is, the more likely it is to attract sellers, which makes for abetter short play. Dont short a stock that geps up 3-5%, for example (we look to play thseon the long side, ffthey make a new 2-day high or are making a cup pattern). Watch your“daily % gainers" list and look to short stocks that are trading over 4UDK volume or so thathave gapped up over 15-30%. Ifa stock hes gepped up over 50% it will almost always attractsellers, so it's @ matter of “when not if* to short it, if shares are evailable to short. Check withyour broker ahead of time that moming to see if they have shares to short. If your brokerhas a lousy (small) list of stocks that are available to short, switch brokers.
Use Level Il and Time & Sales to help time your entries for shorts more than forlongs. We are still chart-pattem based trading using technical analyses, of course, butbecause of the uptick rule and the dynamics irwclved in shorting you should pay closerattention to level 2 support/resistance for shorts than for longs. The t&s is moreimportant of course, that's your navigation for the trade (the “tradewinds”)
Use Fibonacci retrace ments to help you identify your targets for where you shouldcover your open short trades. In the GALT exarnple above, we don't expect more than 36,out of the trade since that's near a fibo line. Your open gaps up will almost never close theentire gap, | look to get out at 1/3 to 1/2 of the retracement range.
Rogue Shorting Skils for Active racers: rious NearmFive
Back toTime of day pattems for best short selling: finding the best trading MODULE 5opportunities& Main Pointss© Becoming successful at timing your trades is * Your primary goal by the time you complete this lesson isImportant to your success to he able to a) anticipate time of day pattems that yield© Inthis lesson, we will look at some of the profitable short trades b) be able to recognize these tirne-time of day patterns that you should be aware kased pivots and reversals when they occur and c) be ableof to short stocks effectively. to execute short trades more successfully as a result of
row "knowing what te look for" in your short trades.Remember that timing takes much practice, and is bathdificult to learn and time-consuming to practice. This iswhy market-watching a core bastket of 5-6 key stocks forweeks, months on end, during at least the first 2 hours ofeach trading day, is so critical to your development as atraderAs a new trader, | used to enter trades late, still locking forgood movernent after the first, ost powerful rcve, hadday pivots as they occut in the market each been made. In time, | leamed to jump on the first moveday. more consistently and accurately. This tekes a lot of timee to develop; the more 1-minute charts you watch, the betterIn time, you will hopefully become more you should get at this crucial trading skill.am a 2 Cg egret eee Each trading day is a mini-werld in itself, you need to notmany poteland| become] better ate} to) apply blanket rules or your expectations to any one day,navigate the directional changes as they rather, you need to be flexible and trade “what the marketCoG is telling you" for each separete session.
By geining familierity with the time-ofdaypatterns that set themselves up for good shortopportunities, you can becorne rnore effectivein “timing your trades" to be in sync with theprofessional money flow.
Remember to keep an eye on the broadmarket indicators as always, an eye on theNasdaq TRIN, the COMPG, and your sectorcharts, to confirm the teversals and time-of* Paper trading, of trading 1UU-share trades, tor @ Lot's take a look at some of the timing pattems Ivemany months, is a great way to learn the discovered that help uncover what should become
intricacies of trading without exposing your consistent, profitable trading opporturitiescapital to much risk This 1s 2 good way to
leam shorting, by paper shorting at least 6months initially before doing live trades
Time of Day Patterns for Shorting Nasdaq Stocks
Here's a brief summary, we will illustrate all of these with racent chart patterns, from Feo 2001, below:
EARLY PLAYS: We've already discussed the "short an open gap up" when there's a bear cup reversal that you can seepremarket. The other early play is a bear cup reversal occurring after the open...
LUNCH PLAYS: Market makers often take a lunch break (hey, they're only human too, contrary to popular perception :)And stocks oflen drift down from 11:30 til 12:45 or so. Leisurely shorts can often be entered in this time frame as well
LATE SESSION PLAYS: Although I rarely or never play the aftemoon session, you can lock for short opportunities late
in the trading day on days where a) the compq is making new 2-day lows after 2pm or b) the market has run upconsiderably until 3pm, and profit-taking is happening
Bear Cup Breakdowns on the Open:
In shorting bear cups right after 9:30, as with open gaps up, you look for an arch, eg the stock gets buyers onthe open at 9.30, goes up to meet resistance, and sterts to fall. The key is, you don guess al the lop, you waittil it makes a new low of the day, and short under the breakdown.
These are best ifthey are rnaking a new 2-day low as well (in this exarnple, let's say ORCL traded 30-31 1/2 onthe previous day. . today, it opened at 29 2/4 on the open, traded to 30 decade resistance, then sold off again,the shart is at 29 5/8.
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par Cup (looks like an arch)
          
 
3029 31429 11229 14
2928 3428.11228 14
‘Short here on a breakdown under 30 resistance
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9:30 10:00 10:30 11:00 11:30 12:00 12:30 13:00 13:30 14:00 14:30 15:00 15:30 2/2101
 
 
 
 
 
 
Patterns for 10am Shorts:Sometimes a stock will choparound til around 10am, atwhich time il makes abreakout to the downside (orupside).
For shorts, we can look to1Qam as a good time; oftenthe traders in a stock willdecide whether to bid it up orsell it off at around 10am.
This ig a good time to look forshort entries, at right before10am, to prepare to short abreakdown
As you can see from thisexample, the stock broke dewnearly at 9°50 or so, then got a{0am bounce, before continuingdown
This illustrates the need toalways keep light stop losses,eg ifwe short at 29 5/8 or so,and it drops to 29 3/4 then starts:to bounce, we cover soon with asmall 1/2 point profit or so, wedon't wait for the stock to goback up to our onginal shortentry point
In the current market, tradingwins over 5/8 point on $20-§60stocks are fine to take, they arethe "base hits" that are ourbread and butter. . of course thehare run +1 1/4 type trades aregreat 10 get as well.
         
KLAC S| [intervalchat >] P|[V @iGles|a| Safir ERT461724645172<--Post-10am, sell program, sellers win1 4544424
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9:15 9:30 9:45 (10:00 30:15 10:30 10:45 11:00 14:15 11:30 11:45, 2/2/01
Shorting Lunch Weakness with the mms:
Oftentimes it is good te look toenter new shart pasitions fromaround 17:30 or noon until 1prn orlater, as stocks will often driftdownwards over the lunch hour,until the mom's return from lunchand volume/volatility returns to themarket, These are longerdaytrades, usually taking 15minutes to an hour or more tocomplete round trip.
Here's a perfect short example:AMAT is stairstepping down in aclassic downtrend: lower lows andlower highs throughout themorning
 
fawat fo] [rvevalcrat =] P| @(Sleal a) Sapir aRShort into Lunchtime Selling. $112
it Perfect Technical Downtrend: $114nh Lower lows and lower highs 51- all morning long Baan50 112
50 114
50
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4912
49 114
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200K150K100K50.0K
9:16 9:30 9:45 10:00 10:15 10:30 10:45 11:
 
 
 
 
 
Late Session End of Day Shorts:
 
00 11:45 11:30 14:45
22001Finally, we can look at late [rtewal Chat] 1 : Fend-ob-day seling There's, NTS rterval Chast Piva; ee
 
two time zones to be awareof, one is from 2-3:30 or so, hthe other is during the close, flfrorn 3:30 til 4pm. !
 
Hy bugThe best is to look for bear Myth A th, a rh
3.30, as selling continues.
cup breakdowns during 2- lunchtime chop/consohdation Nn,
Often youll see somevolatility at 3pm when thebond market closes; also,you may see end of daytanking Or short covering,so, careful holding any short
ait 3:30lel Ai i
Copyright 2000 Dats Broadcasting Comp.Volume
 
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9:30 10:00 10:30 11:00 11:30 12:00 12:30 13:00 13:30 14:00 14:30 15:00 15:30
Module Shorting Skills for Active Traders: S4PREVIOUS NEXT Ds
Back to
« Premarket indications for shorting opportunities: chart patterns, MOBULE 5
hewseaming
@ Main Points:
© Weve already discussed how to lock for largepremerket gaps up, over &-15%, that aregetting selling on the open (bear cups) asbeing the best short opportunity. Now let'slook at a few more,© Premarket activity is @ good leading indicatorabout the overall strengthtweakness of astock when the gap activity is less than 5%.Ive pulled together a handful of exemplecharts for this lesson to help you see how touse premarket charting to correctly identifyshort candidatesYou need to have a charting software datafeed senice (like esignal.com -) that haspremarket chart ability in order to daytradeeffectively. There's no reason to be "blind"each moming in the premarket, when you canhave charts to help you see double tops, cupbreakouts and reversals.
 
 
‘We do not ever enter new positions in thepremarket. This is because our volume is very lowSpeaking of volume, you only want to screen forstocks that heve over 20-30K rinumum volume byaround 910 am. Ifa stock has gapped up a lot ordown on just 12-15K volume, for instance, you don'twant to touch it- yet.
‘We are looking for continuations & reversals on theopen from premarket chart patterns. The stock willdo one of three things: stay flat, go up, or go down,right? We wart to see if there's significantmovement up or down through a good technicalentry point
I tend to like to short stocks that are making new 2-day lows at around 6/8 below the whole number thatwas the previous low/support level. You will see thisin the charts below
Charts let you see the impact of news, eamingsreleases, and anything else, so we use chartpatterns to trade with We do not guess at whatnewsfeamings will mean for the price of the stock -ever. Ifwe did that, we'd be investors. (perish thethought)
sil
38 1438ww37 127aav363436 11236143636 3436 12
500K
2/2101Small Premarket Gap Down Under Previous Days Low
Here's a yood example of a premarket JBACD A\[irterval Chat el) 8) [iy || alse Sapir 2)
 
 
double top failure in BRCD that
continues on down. Provious Trading Day
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Chart Pattern: Small GapDown Under Previous Day'sLow --> BEARISH SHORT‘SIGNAL ON OPEN
Note that we da not short on the open,we instead wait for the premarkatpattern to make a new low, and enter ‘ pithe short at 36 5/8 yeThis is a classic "short the 2-day low
breakdown" after a weak opaning in the
stock.
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PREMARKET
CHART Regular Trading Session
failed bull cup,
reversali‘p short 36 5/8
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10:00 10:30 11:00 14:30 12
37801
 
Below in NTAP - what do you see? | always draw the technical low/high*2-day lines to help you see
what I'm looking at as well In NTAP we see support at 28 in the previous trading day, a weak opewith a small gap down, and a breakdown later in the morning on heavy selling volume We short inthe area of 26 6/8 {uncer the 27 whole number support) and cover out in the high 26s as our coverstop gets taken out on the way up after 11am.
[rap Eelifisecra Chon] 8) 2 al) SAT |)l
 
          
Previous Trading Day
Chart Pattern: Small Gap Down.Under Previous Day's LOW —>BEARISH SHORT SIGNAL ON OPE!
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PREMARKETCHART
    
Nshort 26 5/8
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Regular Trading Session
2928 1122827 1122726 1122626 122524 112150K
100K
50.0KLarger Premarket Gaps Down Under Previous Day's Low
Remember we typically start lookingfor bounces in stocks that gap downmore than 8-15%, right?
‘One exception to this is if the stockgaps down to retest the mmeciateday priors low, in this case to theright, TXCC, that was under 20, at the19.34.
One good thing about these shorts isthat you can easily see where yourcover stop loss would be, eg the 193/4 line.
So, a short on the open, around 195/8, would let you cover as low as 185/8 or so before a bounce takes outour trailing cover stop
For these lypes of patterns, makesure you have confirming indicatorsthat shorting is the right mova, eqyour sector charts all gap down a bit‘on the open, the COMPQ is makingor near a 2-day low, oris selling offafter a large gap up, etc
Finally, we have SUNW, @ stock likeINTC MSFT | rarely trade sincevolatility is low.
‘We do have a good pattern to