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

THE ASYMMETRY OF TOPS AND BOTTOMS

When we talked about buying stocks, we focused on two main approaches—value buying and momentum buying. When we look for stocks to sell short, we cannot simply flip these methods. Shorting is different from buying because mass psychology is different at tops and bottoms, in uptrends and downtrends. Stock market bottoms tend to be narrow and sharp, while the tops tend to be broad and uneven.

Stock market bottoms are built on fear. When longs can no longer take the stress of losing, they panic and dump their shares with little regard to price. Their fingers have been caught in the door, and the pain is so bad that they want to get out at any price.

Fear and pain are sharp and powerful emotions. A selling panic shakes out weak holders, and once they are out, the stock is ready to rise again. As long as you do not buy prematurely and then panic and sell at the bottom, buying tends to be fairly permissive (Figure 7.7).

Figure 7.7 F daily

The asymmetry of tops and bottoms is clearly reflected by the Force Index. Its downspikes tend to serve as good markers of public panics that clear the air and augur new advances. A downspike of the Force Index does not necessarily nail the exact day of the bottom, but it shows where the weak holders are dumping their shares, and the buying opportunity tends to come within days.

Tops are built on greed, a ...