Passive Shorting™: The Second Way to Do It is Selling at the Top
Passive Shorting™: The Second Way. So How Do You Do This?
12-20-2010 Update: I wanted to update the previous version of this Passive Shorting™ article to the current circumstances. First, please get my free SP500Tracker™ newsletter using the link to the right, because it lays out the resistance and support levels for the S&P 500 Index.
We really at the moment only have a very short term top in on a daily basis over the past 7 trading days. The upper limit is already in at 1246.73 and the base support is clear at 1227.08, which is where the last breakout occurred.
So what can you do?
1. First, an argument can be made to stay with the market until it breaks that 1227.08 market timing level. The limitation of this approach will be if the decline through there is swift. Then you are left wondering "how low will it go?"
2. You could take profits at the current levels and rebuy back those shares should we close above the range of the past week.
3. You could set an arbitrary stop somewhere below the 1227.08 market timing signal point for the SP500 index and start Passive Shorting™ from that lower level. The limitation is that if you set a very wide stop and the market reverses just from that point, you may be left behind, so my advice is to plan on getting back in at some point if you end up using the "wrong" stop loss point to sell.
Now to show you that it does not always work perfectly as markets can continue higher and go farther than you may have thought possible, I've included a view of the market from 9-13-2010 just below here. You'll note that I mentioned that the April 2010 high was a potential target if the SP500 were able to make it over the 1131.23 market timing breakout point, which was the June high.
The question you have to answer for yourself is:"Is it worth giving up a small amount of gain to reduce my risk of losing much more or not?"
Each of you has your own answer. Follow YOUR guidance on it, but do have a plan on getting OUT if you stay in and the market turns downward and have a plan on getting back IN if you get out at what turns out to be the wrong point. THAT is worth GOLD in advice terms. You will do far better in your investing and trading if you incorporate that in your own way into your investing plan.
09-13-2010: Passive Shorting™: The Second Way. So How Do You Do This?
Selling at the top means selling at a major resistance point like the top we are now approaching in the SPY ETF (S&P 500). That is what Passive Shorting ™ is all about. The June high of 1131.23 is the major target. You'll note that the August high of 1129.24 was just below that. What that means is that the last time we got up to these levels, investors sold, driving the SPY back down to the August low of 1039.40 and SPY of 104.29-104.31 (SPY on two separate days near the low).
Do we have to fail at the June high? Of course not. We could go through and that would be a buy signal for a move back to at least the S&P 500 May high of 1173.57 or even the April 2010 high of 1219.80.
So why not just wait? Certainly you can do this and do your best to exit the market as close to the top as possible. That is the "first way" to go "Passively Short™." You sell weakness rather than sell at a major top / resistance point that we are approaching now.
So what is the advantage of selling at the top and using Passive Shorting ™ instead of waiting for weakness? Weakness can come on suddenly and you may be down 3% within a day as we've seen in the August failure. The big sell signal came with a 2.82% loss and the one in June came with a 1.61% loss. So it can vary of course.
For you, something in between may feel better such as selling part of your positions at the top and waiting for weakness on the rest. I admit there is a risk of missing the first part of the breakout to new highs. So it's all about how you like to handle risk. Sell on weakness or sell at resistance and you'll be going "Passively Short™" as explained on my page by that name. See the page for more detail on this.
If you sell in more than one step that is called "Scaling Out." I always recommend "scaling out" when you use Passive Shorting™ rather than selling all at once. You may even decide to hold a "core porfolio" that you do not touch. That is up to you. I have a free E-Booklet on a way to scale out OR in. If you want it, simply subscribe to my free "Tips" newsletter BELOW and put "E-B-Scaling" to the right of your first name.
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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