Another method that I favor is working a short position based on the undercut and rally phenomenon I have observed in stocks as they top and begin their longer-term price declines. As a stock comes down, it will start to undercut prior support levels in the chart, and often these undercuts of prior lows in a pattern set up reaction rallies back to the upside. The reason for this is somewhat intuitive. If a breakdown through a “support” level is seen as bearish, this is where natural sellers will be washed out of the stock and short-sellers will swarm the stock on the short side as they see the breach of support as indicative of further, impending downside. Thus as everyone leans over to one side of the boat at the s...
- CHAPTER 2: Short-Selling Essentials
- from Short-Selling with the O'Neil Disciples: Turn to the Dark Side of Trading
- Publisher: John Wiley & Sons
- Released: April 2015
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