Three Ways to Short Stocks

On Wednesday, leading stocks started to sell off, but you wouldn't know it from the action in the indexes. The selling continued Thursday, and it hit the indexes as well. And then on Friday, the indexes were up (led by financial and energy stocks for 2010) while leading stocks were down again. It was pretty much a carbon copy of Wednesday ― while the indexes were up, the big money was selling the leaders.

At All About Trends, the action in leading stocks for 2010 ― stocks that have delivered solid returns during this rally ― is what we use to gauge the health of the market. That's because in order for the market to continue to advance, the leaders must lead the market higher. And lately, those best stocks of 2010 have struggled ― just look at AMZN, SNDA, NFLX, BWLD, JOSB.

That said, it's not surprising to us to see what's happening in the NASDAQ. And since the NASDAQ often leads the market, we expect to see topping patterns in the Dow and S&P very soon.

As you can see above, the NASDAQ has formed a Change In Trend pattern ― from up to down.

Typically, there are three short sell set-ups that provide the best opportunity for low-risk gains. They are:

• Double Tops
• 1st Thrust Down
• Pullback Off Low's

The above chart of the NASDAQ sports all three. The first clue that a change in trend is near is the formation of a double top (the red lines). Then, we have the first thrust down, which you can see from the second top down to the start of the pink line ― the best stocks for 2010 that have led the NASDAQ higher are also now showing a first thrust down which explains the selling in AMZN, SNDA, NFLX, BWLD, JOSB.

And finally, you have a Pullback Off Lows pattern (the pink line). When a stock or an index completes its First Thrust Down, it will eventually find support and attempt to rally. This rally attempt is called the Pullback Off Lows pattern.

All of these set-ups are tradable on the short side.

Let's start with SNDA first. SNDA formed a solid Double Top pattern. This is what it looked like before it triggered a short-sell trade:

When it broke its pink uptrend line, it began its First Thrust Down.

JOSB is another example of a best stock that is in the First Thrust Down phase.

As you can see, JOSB formed a double top as shown by the red line. The blue box is the first thrust down which is often a steep, quick sell-off ― in this case JOSB has lost 14% in just two days.

These First Thrust Down moves start when a best stock tops and then breaks its upward trendline. The place to take the trade is at the trend line break.

Finally, after a best stock completes its First Thrust Down, it will eventually attempt to rally back. When they do that, they will form the third short-sell pattern we look for called the Pullback Off Lows pattern. LOPE formed this pattern back in March and here's what it looked like as it triggered:

This pattern is the exact opposite of the Pullback Off Highs pattern we've discussed in the recent past. It's also usually the start of many trades we can do on the same best stock for 2010. As you can see here, when a stock reverses course and starts making lower highs and lower lows, each rally attempt is a new short-sell opportunity.