Now I am very much aware that many market players do not like to short stocks. This bias against the short side of the market is totally understandable, especially given the fact that the widespread reluctance is garnered and perpetuated by the various exchanges and the other powers-that-be. For example, one can only short a stock if it is trading on an uptick.
That one rule makes getting shorts off (filled) extremely difficult in declining markets. The reason for this handicap of course is to prevent traders from adding to the selling pressure. Yet there is no bias of that nature directed against the upside. The exchanges seem to have very little problem with the market rising in an unfettered fashion.
Now, the number of stocks that can be made available for shorting, even if they are trading on an uptick, is being limited by the exchanges. This further handicaps the short seller, and clearly makes it known that the powers-that-be don't want the public shorting. I don't know about you, but whenever the higher-ups say "No, we don't want you doing that," I ask, "Hmm, I wonder why they don't?" That's me. I'm a questioner. Always have been. Always will be. It's the way I'm wired, I guess.
Of course these rules are said to be for the benefit of the "average investor," whatever that term means. But we as professionals know this to be untrue, at least to a certain extent. These hindrances or barricades to the world of shorting are to protect one of the last areas of really big money. Small fortunes (and some not that small) are made everyday on the short side of the market by those professionals who do not have these restrictions imposed on them.
A Specialist on the American Stock Exchange (AMEX) does not have to wait for an uptick to get short. Neither does a NASDAQ market maker, for that matter. Again, my nature compels me to ask, "Why? Why can they and not us?" It's the same age-old reason, my friends. Money.
Big money. And instead of the little guy being let in on it, he is being kept out, or at least discouraged, all in the false light of "protection." The public is being duped again, and many are buying it. "Why short when the market is going up" is the loud cry we hear from the establishment. Yet it's the establishment who has conveniently made sure they are free of these restrictions in this up market. I smell a rat! And the stench is incredible.
The focus of our approach is to join the well-capitalized professionals (the specialists and/or the market makers) precisely when they are the most interested in the stock going down. In other words, we only want to think about shorting when these heavy weights are also rich with open short positions. This dramatically increases the odds of our being right.
To this end, we have devised a very simple yet powerful approach to let us know when to strike on the short side. We are proud to say that the approach enjoys a very high degree of accuracy, and as mentioned above, is predicated on what the big money will be doing. Let's take a closer look at what's required to use this professional technique.
1) A daily price chart which displays roughly three to six months of price data. As many of you know, we rely on the price chart to reveal the flow of money. An upward movement in the price chart shows buying and a downward price chart reveals heavy selling.
2) Standard Bollinger Bands (20 period exponential bands with 2 standard deviations). This technical tool can be found in every commercial charting package on the market. Even sophisticated order entry systems like Mastertrader and Real Tick III which give traders near instant fills will have this study included. Let's move to The Set-Up.
