Short Stock Analysis

What if you could go inside a trader's mind and trace the mental path to a successful trade? Would that be helpful to you? Maybe.

And, to make it a little more interesting, what if we did it with a short trade, since so many traders seem to shy away from trading stocks short? Might be helpful also.




So, this article is a laborious attempt to record my thoughts as I shorted a stock on Friday, December 18, 2009. It wasn't a huge play - a 1.6% gain in about an hour. But, by allowing you to trace my thoughts and see the charts along with me, I hope you might gain some benefit.

I started by looking at the market context. As you can see in the chart below, the market is struggling to climb higher. It meets resistance and begins to fall around 1:00.


Seeing this, I scan for stocks that have "maxed out" according to multiple crieteria I use. Several stocks come to the top of this scan, one of them being JBL. What follows is my thinking from this point forward.


Looking at the 5-minute chart, I see price hitting a pivot line at $14.77. This matches up with the context of the larger market. What bothers me though, is the 5-min RSI pattern. I see that it has not crossed over its moving average. As long as it continues this upward momentum, then I will not short the stock. But, slowly, price rises to the next pivot line of $15.02. As it does this, the 5-min. RSI is at 100. On the 1-min. chart, the PVT indicator is above the top line of the Money Flow line and looks like this: ^ . (The look of this indicator changes over time, so it is difficult to show it again in a chart.) I also notice on the 5-min. chart that Chaiken's Money Flow has started to descend while price meets resistance at the $15.02 pivot line. So, with market context being negative, JBL hitting a pivot line, 5-min. RSI maxed out, and 1-min. PVT hitting its peak, I short the stock at 15.02. This is at approximately 2:00. My thinking is that I can get at least 1% profit out of this trade, since it has enjoyed such a nice run up in price.


My next task is to look for possible areas of support, since I need to cover my short. Where might price turn back up? Among the many tools I use, I look at 18 SMA (Simple Moving Average) and BB (Bollinger Bands), but I look at these in the 5 and 10-min. windows. What I see is that the 5-min 18-SMA target is 14.89 and the bottom band of the 5-min. BB is 14.80. The one-hour 18-SMA is 14.50.

At 2:15, price = $14.90 and I am close to 1% profit. I could go ahead and take some or all of my profit here, but I look at the 5-min RSI and I see that no crossover to the upside has occured with its moving average.

At $14.87, price has fallen through the 5-min 18 SMA and the 5-min. RSI is near 0. So, no need to cover there.

At $14.83, the half hour MACD has crossed down and through the signal line. On the 5-min. MACD, both lines are below the signal line.

Soon, JBL will touch the 10-min. 18-SMA of 14.80. This is a 1.5% gain at this point. The next pivot line down is 14.78, as shown on the 1-min. chart. So, I am close to meeting double lines of support at this point.


I look at my market chart and see the market is slowly drifting lower, but nothing abrupt.

At 2:40, price has come back up to 14.82 and the 5-min. RSI has crossed up. I know that 5-min. indicators are fluid and can change until their 5-min. periods are completed though. So, I am not overly concerned since the RSI reading is only 6.67%.

Price fluctuates in this area of $14.81 to $14.82 for several minutes. This bottoming of price is reflected in the 5-min. MACD which is trying to form a confirmed bottom below the signal line. As a few more minutes pass, this MACD confirmed bottom breaks down slighlty and 5-min. RSI no longer shows a crossover pattern as it suddenly retreats to 0.

The next few minutes require some tough decisions because price is resisting going a few more cents to the next pivot line of $14.78. The 5-min. RSI crosses over again and now reaches 27.27 with the 5-min. MACD lines barely touching.

Price has now gone up to $14.86 and the 5-min. RSI is at 38.46 - not a good sign. But I also notice that the 1-min. RSI has peaked out and is now at 100, so I decide to wait a few more minutes. It could be that other traders have covered their shorts prematurely, driving the price up only temporarily. I expect the 1-min. RSI to fall from this peak, and price to follow.

Price then comes back into the $14.80 to $14.82 range.


At 2:53, my 5-min. Telechart PVT and RSI indicators climb close to the 50 line. On the 10-min. stockcharts.com chart, RSI has come up through the 30 line. These are all warning signs. I am showing a decent profit and could exit at this point with a nice gain. But what keeps me from covering the short at this point are two factors. I look at the Telechart 15-min. chart and see that TSV and RSI are both below the 30 line and the fast line of the MACD is still descending and almost touching the signal line, with only seconds to go before the 15-minute indicators give a fixed reading at 3:00. What I also notice is that price has bounced around in this narrow two cent range while the 5-min. RSI and TSV indicators have slowly risen to the 50 line. This leads me to believe that price will fall if RSI hits resistance soon. I also notice that the 5-minute candle has turned into a doji (looks like +), reflecting the undecided sentiment of my fellow traders.

So, I put in a limit order to cover my short at the $14.78 pivot line since the 5-min. RSI is showing some resistance to the 50 line. If it falls, then so will price. But it may be only a brief dip, and I am already happy with the profit I've made, so I will be happy with this gain. It is possible that I will miss out on a lower price and more potential profit. But, since the 15-min. indicators are already below 30 and price is showing some resistance to going lower, I figure this is a good decision.

The 1-min. RSI falls back to 0, as my Telechart 5-min. indicators fall below the 50 line. Price falls and my limit order is met. The gain is about 1.6% profit (24 cents divided by $15.02). Price touched on 14.73 for one second and found support at 14.76 before moving back above $14.80.

Now, what can you gain by studying this trade and looking at my thoughts?

Well, I have several questions for you that might help you answer this question.

1. Do you have an understanding of the technical indicators that allow you a similar thought process?

2. If the answer is yes, then could you benefit by keeping a similar journal of your trades? (Since we tend to rewrite our mental history, it is best to do this while the trade is happening.)

3. Do you allow emotion or pre-determined price targets to cloud your judgement and keep you from the profit in hand?

4. Do you have a basket of strategies for trading the afternoon market. (Hint: you might want to check out my video course if the answer is "no".) Click here to read details about the video course.

5. Do you have a method for finding qualified stocks to trade in the afternoon session? (If the answer is "no", then read below.) Even if you're not interested in learning how to get better results from your afternoon trades, I encourage you to keep a trading journal. While you may not want to go into the tedious detail of each trade as I've done with the trade on this page, you will benefit by reviewing your trades.