The New Sell and Sell Short: How to Take Profits, Cut Losses, and Benefit from Price Declines, Expanded Second Edition

PREPARED FOR A SURPRISE

Trees do not grow to the sky, and bear markets do not go down to zero. As investors and traders become distressed, disgusted, and desperate, they keep selling out. Much stronger, better capitalized, and fartherlooking investors buy up their shares. Gradually the supply of shares for sale begins to shrink. This reduces the downward pressure on prices, and the decline stalls. Meanwhile, savvy bargain-hunters start coming out of the woodwork. The pervasive feeling of gloom and doom among distressed sellers creates the foundation of the next bull market.

Figure 9.11 A downchannel—and then a bullish divergence

SHLD daily (to 1/3/2009) with two moving averages

MACD-Histogram and MACD Lines

Force Index—2 day EMA

On this 2008 daily chart of SHLD, we see how a bear market rally in September 2008 ended in a bearish divergence A-B-C (Figure 9.11). There was a high peak A of MACD-Histogram, followed by a crossover B below zero, then a feeble rally C, while the stock rallied to a new recovery high. Notice that this bearish divergence was pretty sloppy, in terms of a complex top C.

There were two sell signals at that top, both from MACD-Histogram downticks. The first one aborted, and even the second signal was followed by a quick rally before prices slid lower. That final rally kicked out traders who used tight stops. One of the key differences between the ...