Passive Shorting ™ After a Failed Breakout

Passive Shorting™: How Do You Do This IF and WHEN a Market Breaks Down?Untitled 1

The point of this is to understand that selling a failure of a breakout can help you protect capital. Look back at a chart of Sept. 2010 for the SP500 Index. If you sold as the market moved back DOWN from the S& P 500 breakout point of 1131.23 (which was the 6-10-2011 high), you were using Passive Shorting™ if you FIRST SOLD near the top AFTER a failure to move up through 1131.23 and SECOND REBOUGHT it as it moved back up from the low, which was May-June support that it hit at the low in August 2010. 

You don't actually go short.  You could but don't have to.  You just move from say 60% invested in stocks to 50% if you want to be very conservative, or from 60% to 40% or even more if you want to protect more of your capital against losses in a decline. 

I recommend you scale out in stages rather than selling all at once no matter what the percentage of your stocks you are selling.  But I must add that it depends on how fast you feel you want to get out.  You have to consider the circumstances. In 1987 it was best to not wait around and scale out if you began selling on the Friday before "Black Monday."

Selling a break back down through a top or a failure at or just below a top is simply selling AFTER a failure rather than selling as a prior TOP is approached from below as I discussed in an earlier article on "Selling at a Top."

You then move back into the market after:

1. A significant decline has occurred and

2. The market begins to move up from some sort of bottom.

AND YOU COLLECT THE DIFFERENCE.  That means that if you sell at 100 and it drops to 45 and you buy back at 50 and it goes back to 100, you end up with $200 for every $100 that your "buy-and-hold-neighbor" Jim has when the market moves back to the old high for the amount you went passively short.


Imagine you have a $200,000 stock portfolio. That is the STOCK portion ONLY.

You go passively short with half of that by selling $100,000 of that at the double top or failure of the breakout.  But your sell point is very close to the top.

You watch the market drop 55%

...and then rebuy with that $100000 cash when the market has come back up 5% and is only down 50%.

The market then recovers to the prior high when you had sold.

You now have the $100,000 in stock you never touched PLUS the $200,000 in stock from the cash you protected when you went passively short.  You invested $100,000 of that protected CASH when the market was down 50%. Going back to even from 50% down is a 100% return! So you made an extra $100,000

You have $300,000 in stock when the market goes back to the old high while your "buy-and-hold-neighbor" Jim has just $200,000.  You are up 50% and he is only "back to even." 

Would you rather be "back to even" and make NOTHING or up 50% by using Passive Shorting™ for half of your stocks?

You can read further details on my "Passive Shorting" page on the Blue Navigation Bar.

CONCLUSION: Remember that the catch in all this is that you MUST rebuy a new high if you are wrong about getting out. This is one of the most common mistakes investors make. They remain in fear after selling and never rebuy. If you are wrong, you admit it, and get back in!   But if you are right, Passive Shortingcould help you both PROTECT the MONEY YOU HAVE and MAKE YOU MORE MONEY.

You must do in the end what you feel is best for you. Do what fits your own temperament and beliefs.

I wish you all the best in your trading and investing.

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Who am I?

I'm David B. Durand, M.D., a physician who has come up with a way to both make money and preserve capital.

I diagnose the markets as sick or healthy, and believe me, you'll want to be in the healthy markets and stay away from the sick ones. You can learn right at my side what it took me 28 years to learn.

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