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

“BULL MARKETS HAVE NO RESISTANCE AND BEAR MARKETS HAVE NO SUPPORT”

In the long-gone days of easy credit, banks were giving out loans right, left, and center. Their misdeeds are amply documented in current literature, including the fabulously engaging The Greatest Trade Ever by Gregory Zuckerman and The Big Short by Michael Lewis. In 2007, the chickens headed home to roost. In 2008, some of them were processed into chicken nuggets and others tossed into the trash. Bank of America (BAC) was one of those hapless birds.

Figure 9.12 delivers several important messages:

• Notice several bearish divergences, marked by diagonal red arrows, as BAC huffed and puffed towards its final peak near $55.

• In the area marked “1,” the fast 13-week EMA swung below the slow 26-week EMA, confirming the bear market. BAC never again rallied above that point—not in 2007, not later, not to the day of this writing in 2010.

• Bullet “2” marks a whipsaw—the one and only week when the fast EMA rallied above the slow one before sinking again. This illustrates that no pattern is perfect, and an occasional whipsaw is a normal risk in trading.

• The downtrend was temporarily interrupted by several sharp rallies. The strongest of them took BAC from point “3” to point “4”—from $19 to a whopping $39 in less than two months. The stock had briefly more than doubled in the midst of a bear market, which was to sink it into the low single digits! Do you still want to hold a short position for the entire duration ...