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I always see articles about "predicting when a stock will rise", but haven't found something for the opposite. Are there any indicators or combination of things that are proven to indicate that a stock price will start or continue on a downtrend? I can't find any articles on this.

I want to start finding stocks that are unhealthy so that I can short them. So far my formula looks like this:

  1. Small cap (Has to be below 5 bucks)
  2. Has to be down 3 days in a row
  3. Larger than average volume
  4. News has to have keywords like "bankruptcy" or "dilution"

I just started on this formula so I'm not sure how reliable it is. Any tips for finding stocks to short?

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    In regards to point 1; if you are looking to short maybe look for stocks above $5, that way there is more room to move on the downside. – user9722 Sep 30 '15 at 4:24
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    @GeorgeRenous you thought that was good math, that was bad math. – CQM Sep 30 '15 at 14:41
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    @GeorgeRenous a stock trading for $.50 can decline in value 5, 20, or 99.99% just like a stock priced at $5.00 or $50.00 or $150.00 can. Share price is a red herring to the entire discussion. – CQM Sep 30 '15 at 15:24
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    @CQM, let me ask you this then, would you buy a stock at $0.50 or $0.10? Would you buy a penny stock? It is more than just the price it is the higher risk involved in trading such stocks. – user9722 Sep 30 '15 at 15:41
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    @GeorgeRenous the only thing that matters is market cap, expected dilution, and finances. A trade is a trade, a $.10 stock can decline to $.01, this would be a 90% gain in a short, it can even decline to $.001. You are trying to draw a distinction, where one doesn't exist. This was never a discussion about risk, you gave the wrong answer about "more room to move on the downside" – CQM Sep 30 '15 at 16:01
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The Art of Short Selling by Kathryn Stanley providers for many case studies about what kind of opportunities to look for from a fundamental analysis perspective.

Typically things you can look for are financing terms that are not very favorable (expensive interest payments) as well as other constrictions on cash flow, arbitrary decisions by management (poor management), and dilution that doesn't make sense (usually another product of poor management).

From a quantitative analysis perspective, you can gain insight by looking at the credit default swap rate history, if the company is listed in that market. The things that affect a CDS spread are different than what immediately affects share prices.

Some market participants trade DOOMs over Credit Default Swaps, when they are betting on a company's insolvency. But looking at large trades in the options market isn't indicative of anything on its own, but you can use that information to help confirm your opinion.

You can certainly jump on a trend using bad headlines, but typically by the time it is headline news, the majority of the downward move in the share price has already happened, or the stock opened lower because the news came outside of market hours. You have to factor in the short interest of the company, if the short interest is high then it will be very easy to squeeze the shorts resulting in a rally of share prices, the opposite of what you want. A short squeeze doesn't change the fundamental or quantitative reasons you wanted to short.

The technical analysis should only be used to help you decide your entry and exit price ranges amongst an otherwise random walk. The technical rules you created sound like something a very basic program or stock screener might be able to follow, but it doesn't tell you anything, you will have to do research in the company's public filings yourself.

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First utilize a security screener to identify the security profiles you are looking to identify for identifying your target securities for shorting. Most online brokers have stock screeners that you can utilize. At this point you may want to look at your target list of securities to find out those that are eligible for shorting. The SHO thresold list is also a good place to look for securities that are hard to borrow to eliminate potential target securities. http://regsho.finra.org/regsho-Index.html Also your broker can let you know the stocks that are available for borrowing. You can then take your target securities and then you can look at the corporate filings on the SEC's Edgar site to look for the key words you are looking for. I would suggest that you utilize XBRL so you can electronically run your key word searched in an automated manner. I would further suggest that you can run the key word XBRL daily for issuer filings of your target list of securities. Additional word searches you may want to consider are those that could indicate a dilution of the companies stock such as the issuance of convertible debt.

Also the below link detailing real short interest may be helpful. Clearing firms are required to report short interest every two weeks.

http://www.nasdaq.com/quotes/short-interest.aspx

  • There's some good information in there but it doesn't really answer the poster's question. The poster's looking for the information they would use to do the search, not how to do the search. While adding information above and beyond what the poster's specifically asking can often be useful, doing so but not actually answering their question probably isn't. – blm Sep 30 '15 at 18:50
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First, it's much safer to be shorting stocks over $5 than stocks under $5. I use 3 indicators to show that a stock has topped out and about to drop. Key is the timing cause the initial drop is often the biggest. More close you get in at the top, the higher the risk.

Using 1D Charts ONLY: - MACD Indicator: I use the histogram, when it reaches a peak height, and the next day it is down 1 "Step". If you wait til the MACD lines cross, you are pretty late IMHO. Need to get in earlier. Timing is everything. - RSI(15) - Needs to topped out and above 67 meaning, "Over bought" - Do not buy when RSI is high above 70. Often stocks go on a Run up when RSI is over 70! - I use Stoch RSI or CCI to confirm my status on RSI. I like to see that all 3 indicators agree. This gives me a 75% chance that the stock will drop. It may take a day or 2.. so you need patience.

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