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Our critical day analysis is all about trend reversals. We tell you when there is a high potential for a reversal of the short trend and we've been doing it since 1994 with an 80%* accuracy. |
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Short Selling Short Selling is the act of borrowing stock to sell with the expectation of price dropping and the intent of buying the stock back to replace at a cheaper price. There are substantial risks with short selling, some of which can be avoided through education on the process. Short interest is a measure of the total share volume that is currently short the stock. When a person short sells, the order must be identified as a short sale and these statistics are kept for each stock by the exchange. Short interest can be a source of demand if buyers become enthusiastic for the stock and price rises prompting some short sellers to reduce risk by buying back stock to replace and closing the short position. A short interest ratio is found in several newspapers and databanks and is a calculation of the latest reported short interest positions for the month divided by the daily average trading volume. A high ratio is considered bullish while a low ratio is considered bearish. A ratio of 2 is considered 2 days potential buying power. The short interest ratio is called a contrary opinion indicator because an increase in short selling is an indication of a strong potential demand element as short sellers are likely to close positions quickly if the market price proves them wrong. Clearly it is necessary to have a fundamentally based informed opinion on the potential for price reversals during periods of high short selling to see this as a valid approach. Odd lot short sales has been considered a measure of uninformed investors and was used by investors to give evidence of market bottoms as late comers to the market were considered uninformed. This is less valid for the current market. Specialists short sales are also available as a data source for measuring short selling. This is considered the smart money. Often investors watch the ratio of specialists short sales to total number of short sales to give an indication if the smart money is bullish or bearish. This can be distorted by the increased use of derivatives in the recent times. A short sell can be used as part of a bullish strategy as so can skew the basis for interpreting the ratio. Our critical day research can be used with stocks that are highly correlated to the major indices. When a critical day is an expectation of a change in direction of the price trend, short sellers have advance warning either to prepare an entry strategy or an exit strategy for a position already opened.
Strategies First and foremost an investor sells short because the underlying interest is projected to decline in price. Another strategy is to sell short as a measure of protection. This would apply to an investor who owns the stock and wants to lock in a price to be able to sell the stock should the price fall. In this instance the investor is said to be selling against the box. This means he selling short shares that he already owns. Generally options are used as insurance or protection if they are available on the security. Selling short can also be a tax deferral strategy. Again an investor can sell against the box, locking in a sell price but deferring the actual sell until the next tax year begins. At times, when an investor can't access the stock but wants to sell, short selling the stock until such time as they can access the shares locks in the price while the short sell is in effect. Short sellers can incur significant losses if the market moves against them. Implementing a trading strategy that includes short selling must fit your personal objectives, knowledge and risk levels. Special Notes Try plotting the short interest ratio and the Specialist/Public ratio in order to gain insight on historical trends and correlation to movements in market valuation levels. Using a moving average smoothes the ratio, helping to identify trend and filtering out the noise of each periods volatility for the ratio. Generally a 4 week moving average is used. A Specialist/Public ratio greater than 4.0 is a bearish signal since it indicates heavier weight on the short side of the market by specialists. A ratio below 1.0 is bullish as specialist positions are closed and/or Public positions increase.
To the right technical studies are examined in more detail to provide a sense of conformational evidence for traders of the critical day. Click on any of the terms to take a closer look at a technical discussion on that topic. All formations, patterns, indicators and technical tools fail at various times and so should only be used to build a body of evidence in forming a trading decision rather than being solely relied upon. There are a number of valuable studies that lead to intuitive understandings about price and volume but a strong compliment to technical analysis is an understanding of the trends and changes in the fundamentals and economic activity that ultimately lead valuation levels in the markets. Walk through a critical day
A closer view of the most recent signals. You can see the short trend immediately prior to a successful critical day, reverses coming away from the critical day. Often a failed critical day will indicate a stronger bias in the market for continuation of the trend that was in place prior to the critical day. A failed signal can therefore provide as much information and opportunity as a successful one. Take a look at tech studies to develop a sense of trend reversals and use. |
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Copyright © 1999-2007 Trade10.com. All rights reserved. *based on the critical days generated from 1994 to 2000 plotted on the S&P500 Index |
