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

A BEAR MARKET IS A DESTROYER OF VALUE

In the wake of the economic crisis, the media has been brimming with reports about the damage inflicted on the public by recession. While unemployment and bankrupt businesses make the news, Figure 9.8 shows what a bear market does to capitalists.

The vast majority of shares in SHLD—Sears Holding Corporation—are held by institutional investors. The 2007-2009 bear market took SHLD down from nearly $200 to below $40, wiping out over 80% of its value—not quite as disastrous as the 95% decline of MGM, but still plenty of blood, sweat, and tears.

Figure 9.8 Shorting an Institutional Favorite

SHLD weekly with two moving averages and an Autoenvelope MACD-Histogram and MACD Lines

As we review the massive downtrend of this institutional darling, let us see how a private trader can profit at the expense of large institutions.

1 and 1a. As the bull market rises to its final peak, two bearish divergences, both coupled with false upside breakouts, signal the end of the bull market. These loud signals tell savvy traders to sell and begin shorting.

2. The fast 13-week exponential moving average crosses below the slow 26-week exponential moving average, confirming the bear market.

3, 3a, 3b, and 3c. Pullbacks to value. A bear market does not move in a straight line. The downtrend is periodically interrupted by rallies, some of them quite sharp. Look ...