Shorting Stocks Explained: 50 Day Crossing 200 Day Moving Average Signals Major Market Drop

By: Jeb Handwerger | Thu, Jul 8, 2010
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These past few days as the market indices broke through the head and shoulders neckline, I have had a barrage of emails asking if it was too late to buy inverse etf's after my original short sell recommendation on June 21st 2010.

My response to many readers is that if it is apparent to everyone to short that is the time to cover. It is dangerous to short when stocks are going into new lows as often time there are powerful dead cat bounces where covering takes place.

No one knows how to sell at the top or buy at the bottom. The only person who knows that is a liar. Often at tops every chart looks bullish, earnings are fantastic and every newsletter writer is bullish with new price objectives. Similarly at market bottoms charts look awful, stocks are experiencing losses and every newsletter writer is telling you to run for the hills. Be aware of the obvious because when it is evident to everyone that is when you have to be contrary to the market crowd.

Last week everyone was buying puts and shorting the market when it was an obvious head and shoulders pattern with a very bearish declining neckline. The slope of the neckline determines the bearishness of the pattern. It is important not to short when it is obvious and breaks the neckline. I look at key areas to short on counter rallies. Price volume action is very poor and I expect a few more days as it rallies to the resistance trendline and 50 day moving averages for additional short sale points.

Dow Jones Industrial Average Daily Chart

The goal of a trader is to find key areas of support to buy when the stock is moving up and specific points of resistance to sell short. Markets don't top or bottom in a day. Often there are several signals to show that a market trend is changing. During those times there are often major counter trend rallies to shakeout the weak or inexperienced short traders who bought as the index dropped into new lows.

The cross of the 50 day and 200 day is called the cross of death for a reason quite often there is a major break to the downside over the next few weeks.

This past week as many analysts and publishers recommended to go short as the index broke the neckline of the head and shoulders pattern. I disagreed. I would definitely not recommend shorting into new lows but shorting at the end of a counter trend rally or where there is overhead supply where many investors want to get out.

If you are looking for possible points to go short stay tuned over the next few days as I will be sending out an alert to free subscribers.



Jeb Handwerger

Author: Jeb Handwerger

Jeb Handwerger

Jeb Handwerger

I started reading charts at eleven years old. One day my father, a market trader and technician found his library of books on technical analysis mysteriously disappearing. He later found the textbooks under my bed. For many years day and night I studied technical analysis and charting, working and learning from my father who has over 50 years of trading experience. Technical analysis is my passion and love.

In 2001, I started noticing the junior mining stocks and gold as having a tremendous upside. For the past 9 years I have researched many juniors and have identified the major winners using technical analysis and finding top management.

I earned a Bachelors Degree in Mathematics and a Masters Degree. I learned most of my technical analysis from the school of hard knocks, managing real money for myself and for my family.

Constantly perfecting my craft, I have traded for two decades of success in many different markets. I have been asked to post ideas to some of my students who have taken my course in charting and technical analysis. I have made an excellent living trading stocks for myself.

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