Long Term Short Sale Opportunities

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The chart above is EBAY showing its 2001-2005 bull market and then the following decline into 2006. I am putting it here first to use as a classic template so to speak to get the idea of what to look for in a great short sale candidate on a longer term basis.

First notice a multi year bull market. Then after the peak, a sharp decline that clearly breaks the simple trendlines of the bull market lows. After this there is an overlapping advance that is much less explosive than the decline. Often connecting the upper and lower boundaries of this advance will form a wedge pattern called a rising wedge. The total advance often retraces about 50-70% of the decline, or ideally around 62%, and usually does not go back above the broken trendline.

Studying technicals for divergences on new highs in the wedge can often clue you in to a topping area for the advance, as could staying on top of general market sentiment. Looking for false breakouts and technical divergences can offer an early entry point into a short position. However, another great time to go short is after price breaks below the uptrendline of the wedge.

So on a simplistic level you see price go from explosive upward moves with less explosive consolidations/declines to a larger and more explosive decline than any of the bull market. That is followed by a less explosive advance. So you can easily see the shift in price behavior.

Once the lower trendline is broken you can short with a buy stop above the high of the wedge, and hopefully move it down quickly if the stock declines further. Any time price breaks to new lows in the new downtrend, you should move your stop level down above the most recent consolidation. That will simplify the sell process in case you miss selling near the bottom of the decline and price start moving up substantially. However, following weekly charts with oscillators like stochastics and MACD will give you guidance in recognizing oversold conditions as they develop in the stock. Using a trend identifier like Wilder's DMI/ADX system will also help you stay with the trend and recognize when it starts to weaken. Progressive stop movement as price breaks to new lows is a key in protecting gains.

So keep those basic ideas in mind when looking at the current example in the next few charts.

This chart is Sears Holdings, SHLD. It has not broken its uptrend line yet, but may be close.

This is Ventas, VTR which is a real estate stock. It hasn't broken the uptrend yet but is close and is just underneath what I judge to be a major resistance area on the chart.

I love the look of this chart. It is FMC Corp., FMC, which is a chemical company with specialty in agricultural chemicals. It has a very nice looking wedge after a major decline off the highs of a long bull market in this energy related sector. It has not broken the wedge yet either but may be close.

As general guidelines on when to consider selling and what to expect, here are a few...

1) expect price to go below to lowest point of the bottom of the wedge (low of the major decline off the highs

2) use the percent decline from the high to the first major low, to project down from the top of the wedge once complete to get an approximate area for bottoming. So if the stock tops at 100 and decline to 50, that is 50% loss. Then it rallies back to 80 while forming the wedge. Once the wedge is broken, you then take a 50% off of 80 and arrive at 40 for a bottoming area.

3) If the stock has been declining for months and then it accelerates to the downside in near vertical fashion (like a crash) you often are looking at a capitulation into a bottom, so it helps if you can learn to recognize that and sell into it or at the first sign of a reversal. This time may be accompanied by a very large gap down after already falling a large amount. That would be a potential exhaustion gap.

4) The more adept you become at understanding general market sentiment, it will help you in identifying times of extreme general pessimism when you will expect a market bottom. When you recognize these time, move your stop down further, and be alert for the signs of capitulation.

5) Once you get out, particularly for a big gain, don't try to get back in any time soon. What in the past is past, and you should be looking for opportunities on the other side of the market or just waiting and watching.

I haven't ever posted trades on individual stocks on the blog, but in the event that anyone wants to look further at these or other stocks, just leave a comment. Also, I would consider tracking some of these if people have interest, but it's just more work and time for me if there is not much interest, so let me know.