Looking for a short technique? I have one for you here on Square (SQ). (October 12, 2018)
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I want to look at Square ( NYSE: SQ ) today and this is why: We are talking short selling; I won’t say it’s a proxy but it is kind of a representative of most of the market. What I am talking about is this: A nice strong uptrend; Square ( NYSE: SQ ) is definitely the place to be, not a square owning Square ( NYSE: SQ ). Sorry, that was a really bad joke. It wasn’t really even funny enough to call it a joke.
Here was the uptrend; the stock broke down below the 50-day moving average, which it had previously been illegal to do, it was holding at the 50, it broke down below the 50-day moving average on volume. And then the next day, meaning yesterday, Thursday, was on MASSIVE volume. So this was a big old massive selling climax, time to get out of the stock. Everybody just puking this thing up like you couldn’t believe because it was going straight to zero, right? Then Friday comes and the stock gaps up over 10 percent. The stock gapped up over 10 percent and then what happened? Let’s go to a 1-minute chart; this puppy peaked during the first minute, during the opening minute of trading and never looked back.
So many stocks did that very thing. The Nasdaq ( NASDAQ: QQQ ), the same thing; now ultimately it moves up here but, hello, this is 100 stocks, not just talking Square ( NYSE: SQ ). We had a big gap right at the end of the day and then the stock sold. It never recovered. We are talking about shorting here. You don’t want to short a stock when it breaks down; you’re too late, you are too late if you are shorting a stock when it breaks down. You could still make money but you are really too late you are taking on a lot of risk because you don’t know when this rebound is going to happen but you know that ultimately it’s going to happen.
You don’t want to get, as the saying goes, caught short. So you wait for the stock to rally AFTER the break down. It breaks down first, the longs get crushed, the stock rebounds and then you short, right? No, wrong, you don’t. You watch to see how healthy the rebound is. If this box was clear as opposed to solid green. Then you would not want to short this stock because the close is higher than the open. But as it is here the stock gapped way up here and that was the end; that was the end of the buying. Now it is all sellers.
The best time to be short was right at the open but you can’t go back and do that now; but this is a really good short entry assuming the market cooperates and we have more weakness. You can short because you know what your drop dead level is. The high of the day was 76.38, we’ll say it was 77.00. So you are shorting here and you say, “Well, I am only going to buy to cover if the stock hits $77.00. If it runs up above today’s (meaning Friday’s) intraday high that is when I am going to cover.”
So you go ahead and short a stock, it doesn’t have to be Square ( NYSE: SQ ) it can be almost any dang tech stock, they all look the same, just go for the liquid ones. You set a stop up here and then what you are looking for is not this. What you are looking for is just a little bit of this; you are looking for $3.00 or $4.00 here, maybe just down to 70.00, but hey, I will take $4.00 on a $74.00 stock any day.
This is the type of pattern you are looking at and then you just cover when the stock stops going down. But as a general rule or a general market comment, I would say look for this kind of thing. Look for more weakness. On a lot of stocks they won’t undercut Thursday’s intraday low. And then look for ultimately some kind of new trading range. Just enough down here to cause all the armatures to lose money and at the same time allow all the pros that have been de-risking for a while to liquidate their stocks.
You want to be on the right side of the trade, not on the wrong side of the trade. Right now, the way I see it, the right side of the trade is to be shorting with a tight buy stop above Friday’s intraday high. So you define EXACTLY how much you can lose and then you have got a trade that you can work with.
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