Stocks

When to Short

brandonwendell
Brandon Wendell
Instructor, CMT

Online Trading Academy’s core strategy is centered on the proper reading of price action. We interpret what the market is telling us to do and act accordingly. If the security we are trading is in an uptrend, then we are buyers. And when the trend changes, we become sellers. There are techniques we can use to identify the turning points of the markets to buy the bottom and sell the top.  But it is always easier to be patient and wait for the trend to develop and simply join that trend in progress.

Many novice traders and even notable fund managers have been caught shorting this market too soon.  Many were trying to time the top and were shocked to see the markets’ ability to continue upward.  I had not seen any signs of the markets top and was still a mild bull.  I warned of shorting too soon a few weeks ago in my August Market Update article.

The S&P 500 index and other indexes are starting to show weakness.  As I write this article, the weekly chart of the S&P 500 is forming the right shoulder of a head and shoulders formation.  This last occurred in 2011 and led to a sharp decline in the markets.  Even the pausing prior to the pattern is eerily similar now to how it looked a couple of years ago.

inx weekly hnsWe should be reminded that if we make lower highs followed by a lower low, it could be a precursor to a bear market as we saw the same formation in 2007-2008.

2007 head and shoulders

The key to whether this formation and a bearish trend will happen is the supply level on the daily chart.  Price is currently touching that supply and if it holds and sends prices lower, a trader should expect a bearish winter if we break to new lows to complete the pattern.

inx daily sept 2013

The weekly charts of the equity indexes are still in a bullish trend.  They have not confirmed the reversal and may not.  Be patient with longer term trading and investing and make sure you protect your capital with stops.  Without overhead supply zones in the S&P, the Dow, or the Russell 2000 index on weekly charts, trying to time the top is more of a guessing game.

Disclaimer
This newsletter is written for educational purposes only. By no means do any of its contents recommend, advocate or urge the buying, selling or holding of any financial instrument whatsoever. Trading and Investing involves high levels of risk. The author expresses personal opinions and will not assume any responsibility whatsoever for the actions of the reader. The author may or may not have positions in Financial Instruments discussed in this newsletter. Future results can be dramatically different from the opinions expressed herein. Past performance does not guarantee future results. Reprints allowed for private reading only, for all else, please obtain permission.