My Strategy

     It's about time I lay out all of my rules/criteria for choosing the stocks I short. There are always minor variations in the chart patterns (and I'll be the first to admit to bending these from time to time), but I like to stick to these 7 'unbreakables':

1. A stock that's had an incredible run (think 300%+ gains) over a short period of time (not longer than three months, and preferrably within three weeks).

2. I like the $2-$6 range, meaning the stock's around $2 at the beginning of it's run, and $6 near the top (or when I would consider shorting). I've found $1-$4 and $3-$8 can also work, but you get the idea.

3. It has to have had it's first down day. Period. Why short into something that hasn't shown the first sign of weakness?

4. Try to short stocks with a market cap <$500 million. You don't want extremely small market caps, though, or the broker you borrowed the shares from may force you to cover.

5. Large Volume spikes at onset of run have dissappeared (looks like a downhill slope).

6. Commit 100-300 shares initially to a short, and add only once more if it spikes (short squeezes) more than $2.

7. Fight every urge to cover!!!

     I haven't completely mastered the decision-making process when comes the covering for a profit. Currently, I'm using the same stair-stepping strategy used in shorting (Rule #6): Ease in and ease out. With the exception of Rules 6 and 7, this is pretty much the strategy I've learned following Timothy Sykes.

Warning: Do not try this at home!

Mission Accomplished: HSNI

I've completely closed my HSNI short by covering the last 50 shares at $4.84. Below is a screenshot from Think or Swim showing the exact time of my fill, as well as the total P/L (profit/loss) for HSNI and running P/L for my short-in-progress MAXY.

I have to say, this stock couldn't have reacted more perfectly. Here is the progression from rise to fall (feel free to click here to follow along with the 3 month, Yahoo! chart):


1. Stock had dropped to $1.50ish in early Dec. (just a bit over a month ago)
2. After breaking out of numerous resistance ceiling's (mostly around the $4 range), volume spikes (and no doubt some short-covering) helped to push this over $6 (enter my initial short), then $7.
3. Volume began to fade along with the stock price.


This one really was that simple. I documented my thoughts all along the way with this blog, even saying that I would cover in the upper $4s. I was surprised it happened as quickly as it did, but said all along it was inevitable. After commissions ($45) my total profit for HSNI was $403.52. Not bad for two weeks and what I'd call a no-brainer play. Below is an example of a 5-day chart any short loves to see.

Thus concludes my celebrating. I'm out to find the next short (Thanks to TIM for finding HSNI) while waiting for MAXY to fall. I'd love to hear any thoughts, critiques, and/or questions on this trade.



Thrilled at my strategy's first big confirmation,



Evan

One Down, One to Go...

I've officially covered my HSNI position for a profit of about $350 so far (I say 'so far' because with so much downside potential still left in this stock, I opted to keep 50 shares short- which I'd like to cover in the $4 range). I could explain it all in detail, but I'll let this Think or Swim chart that I've used good ol' Paintbrush on, along with my past few posts, to do it for me.


You'll notice I covered for a small loss on the 26th once it broke out above it's 6.40ish high from 12/23/08. I still used solid technicals, but overall I still believe it doesn't matter all that much- 'certain' penny stocks that have gone from $2 to $7 (as I've learned from TIM) will settle back down if you can ride out the short sqeezes that can occur. I'm very pleased with this outcome on HSNI and first confirmation that my strategy is sound. Taking my emotions out of play and simply relying on time/technicals to do my work for me is such a relief- and profitable.

As for MAXY, the volume continues to wane- giving me the impression that the end is near. We shall see- if it continues to climb and test it's previous $12 resistance, I could be short my 300 shares for a bit longer than I'd hoped. Regardless, I'm sitting on a pile of cash courtesy of the Home Shopping Network (HSNI) that I'll use to short the next victim. I don't see anything that fits my strategy's description just yet (aside from XTXI which I may short on a morning spike tomorrow), but if there's two things I've learned trading that I've yet to master, it's 'don't force a trade' and 'don't enter a trade out of boredom'.

May your next cover be a profitable one,

Evan