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

KEEP SHORTING ON THE WAY DOWN

You do not need to sell the very top in order to profit from a bear market. Many shorting opportunities emerge during a lengthy decline. Some falling stocks remind me of drowning people—they keep coming up for air before sinking below the surface again.

This example comes from my trading diary. O’Reilly Automotive (ORLY) belonged to the multitude of stocks that cracked to a new low in October 2008. Its weekly MACD-Histogram also fell to a new low, reflecting the bears’ great power and flashing a message that the October bottom was likely to be retested or exceeded.

Figure 9.17 ORLY Rallies in a Bear Market

ORLY weekly with a 26-week EMA, an Autoenvelope, and MACD

During the recovery from the October 2008 bottom, ORLY rallied above the high it had reached in summer of that year. The rally looked nice on the surface, but it did not cancel October’s bearish signals, which called for trouble ahead.

At the right edge of the weekly chart, a number of bearish signals emerged in rapid succession (Figure 9.17). Their message was that ORLY was tracing a top and nearing a downside reversal. First, prices refused to follow through on their breakout and basically stalled in the vicinity of the resistance level. The weekly Force Index began deteriorating and then weekly MACD-Histogram ticked down. That turned the weekly Impulse system from green to blue, ...