The following shows a brief overview of shorting signals in a downtrend. The setups resemble buying signals in an uptrend. There are, however, subtle differences. The below figure illustrates three key shorting signals.

Read them like this:

1. The breakdown from support.
2. The breakdown after the stock rebounds to resistance (supply), then drops back into its downtrend.
3. The add-to-position point for position traders. Here, the price collapses below the previous pivot low, or support.

Typically, both swing and position traders will sell short the first breakdown below the support area established in the rollover phase (see 1). Swing traders will buy the shares back to „cover their short“ within a day or two, depending on the price action. Position traders will watch the stock rebound to resistance. When it „smacks its head“ on that resistance and resumes its downtrend below the low of the highest rebound day, they may add additional shares to their original position (see 2).

Swing traders, who sold short at the first breakdown and closed the trade, or „covered“ before the first rebound, can also sell short again at (2). Both traders can add to their position at (3), as the stock falls below the support of the last low and continues its tumble. If the stock/industry/mar­ket shows signs of rebounding at that support level, swing traders might want to take profits.

The following two charts show stocks breaking down from their Stage Three tops and dropping into downtrends. Check out the 1–2–3 entry points. Signals 2 and 3 may come at one time. A stock falling into a downtrend can push up to previous resistance, then gap down multiple points. It can breakdown from the rebound and pass prior support-all in one candlestick.

May, 2008 <!-break-->