• DAVID SAITO-CHUNG
• 08:00 AM ET 02/09/2022

On the long side of investing, you must get comfortable with seven basic chart patterns that big winners trace before they break out to new highs and bold gains.

As you read IBD, you’ll come across the cup with handle, double bottom and flat base. In time, you’ll also pick up the elements of a saucer, an ascending base, a base on base, and the high, tight flag.

On the short side, you don’t need to know seven patterns. But you must learn how to analyze the head and shoulders. And in time, you can get good enough to glance at a chart and say, without hesitation, “Hey, that looks like a head-and-shoulders pattern forming.”

Yet visual recognition alone is not enough. Know the core criteria of a good head-and-shoulders topping pattern by heart. The more you lock these into memory, the more quickly you will process chart information and make the right trading decisions.

How To Sell Stocks Short: Learn This Pattern

A good head-and-shoulders pattern has these characteristics:

1. A sharp rally to new highs, followed by a fast drop below the 10-week moving average.
2. At least two or three attempts by the stock to rally back above or near the 10-week line, feeling resistance each time.
3. The completion of a left shoulder, head and right shoulder in five to seven months, in most cases.
4. The right shoulder tends to form at lower prices than the left shoulder.

Once these conditions have been met, then look for an entry point — typically when the stock breaks through the 10-week line in big trade. If the trade does not work out, cut losses at 8% or less.

The rally attempts to the 10-week line following a big sell-off take place because bulls in the stock still exist. They see an irresistible opportunity to load up at “cheaper” prices. Yet at some point, more sellers flood the market.

NII Holdings, which expanded cellular telephone service across Latin America, lit up the stock market with stellar gains from 2003 through 2006.

The stock, which formerly traded under the ticker symbol NIHD, soared after breaking out of numerous good bases in 2003, 2004, 2005 and January 2007.

The Descent

The telecom leader rose more than 3,600% from its IPO base on the way to a peak of 90.43. But during late July to mid-August of 2007 — the fifth year of a major bull market — NII sold off fast. Go to a daily chart, and you’ll see no fewer than seven declines of 1% or more in above-average trading.

On Aug. 16, 2007, NII went into free fall, sliding 4% and closing further below its 50- and 200-day moving averages in monster volume. That was the wrong time to sell shares short. When it’s obvious that a stock is weak, bulls and market-makers come in and bid the stock up hard. Some shorts cover.

Over the next 12 sessions, the stock rebounded 26% but failed to stay above the 10-week line. After another sharp dive, NII reclaimed the line, but not for long.

This ebb-and-flow action created the right shoulder. The right time to sell short came in the week ended Oct. 5, when NII slid 12% in the heaviest weekly trade in more than a year and easily crossed below the 10-week line near 76. One could have covered the position three weeks later for a gain of as much as 45%.

NII filed for bankruptcy protection in 2014 and exited bankruptcy with court approval in June 2015, according to Wikipedia.

A version of this column originally appeared in the Jan. 6, 2014, edition of Investor’s Business Daily. Please follow Chung, deputy markets editor at Investors.com, on Twitter at @SaitoChung and @IBD_DChung for more on growth stocks, buy points, breakouts, sell rules and market insight.

How To Sell Stocks Short: Uncover The Head-And-Shoulders Pattern

• DAVID SAITO-CHUNG
• 01:00 PM ET 01/04/2022

There are at least three keys to a smart search of how and when to sell a stock short. The first key? Look only at stocks that rise at least 300% to 400% in price to new highs.

The second key: Count the number of bases. The more bases, the more likelihood that a good short-sale entry will emerge.

The third key: Become sensitive to leading stocks as they show days of falling sharply in above-average volume. The Stocks On The Move table, found every day on the home page of Investors.com, as well as the weekly version of this table on B2 in IBD Weekly, can help.

Use all three keys to sharpen your ability to identify the head-and-shoulders topping pattern.

How To Sell Stocks Short: Identify This Key Pattern The IBD Way

It can be tough at first to spot this pattern. After all, a leading stock is generally rising and striking new highs in price. However, seasoned investors know that it’s a series of big drops, often in heavy volume, that helps to shape the head and shoulders.

When a stock forms a base and breaks out to all-time highs, it doesn’t guarantee success for investors who bought at the proper buy point. The stock may rise a few points, then reverse lower and dive into the price area in which the base formed.

Such action produces the left shoulder and the head of the head-and-shoulders pattern.

Use IBD’s top research screens — from the IBD 50 and Big Cap 20 to Sector Leaders to Stocks On The Move — to make a watch list of stocks that break out, then wobble. Keep a close eye on The Big Picture column and the current outlook displayed in the daily Market Pulse table.

Are you seeing multiple flawed cup patterns forming? Is heavy distribution piling up among the major stock averages? Is the current outlook flipping rapidly from “confirmed uptrend” to “uptrend under pressure” or from the latter to “market in correction”?

If all of these elements are in place, the market soil is likely fertile with short-sale candidates.

Selling Boeing Stock Short After Its Big 1960s Run

Study the daily and weekly charts of a stock. As a stock falls from its highs, the price declines should be large, and volume should swell. Watch if the stock rallies back to the 50-day moving average (10-week line on a weekly chart), then slips back below it. If it happens two or three times, a right shoulder may form.

The right shoulder often trades in a lower price area than the left shoulder. That pattern tells you that sell-minded institutions are growing.

After the right shoulder has formed, the time to sell short is when the stock falls through the 10-week line in heavy volume.

Short as close as possible to that support level, and be sure to cut losses at 7% to 8% if the stock rebounds and shows strength.

Boeing rallied from a low of 15.25 in 1963 to a peak of 91 in the week ended April 15, 1966. But Boeing nose-dived 11% the next week, the worst decline in years.

Volume surged (1). That shaped the head of the pattern.

The aircraft and satellite maker dived 33% in a matter of weeks. A rebound back above the 10-week line raised hopes for the bulls. But the stock had trouble holding above the key support line.

By July, a five-month head-and-shoulders pattern was complete.

Notice how the 10-week line was now bending lower. A short sale near 71 yielded a fine profit. Boeing fell to 57 just five weeks later. The profit topped 25% — time to cover.

A version of this column originally published in the June 1, 2015, edition of IBD.

Please follow Chung on Twitter: @saitochung and @IBD_DChung

A Little Knowledge Can Make A Mess Of A Short Sale

• PAUL WHITFIELD
• 05:56 PM ET 01/04/2016

For individual investors who like to sell stocks short in bad markets, the head-and-shoulders pattern often provides a reliable entry. IBD founder William J. O’Neil observed in “How to Make Money in Stocks” that when identifying a top in a stock, “head-and-shoulders patterns are among the most reliable.”

Yet problems sometimes occur in interpretation.

“If you have only a little knowledge of charts, you can misinterpret what is a correct head-and-shoulders top,” O’Neil added. “Many pros don’t interpret the pattern properly. The right (second) shoulder must be slightly below the left shoulder.”

Juniper Networks (JNPR) debuted on the stock market in mid-1999, just in time to ride a technology stock melt-up.

A melt-up is a type of stock run-up that usually involves panic buying among investors who are afraid they are missing out on something big. It may occur without any stepped-up earnings to back up the euphoria. This is what happened in 1999-2000, when the market was an expanding balloon headed for a pop.

In the quarter ended June 1999, Juniper reported an operating loss of $4.2 million vs. a loss of $7.6 million in the year-ago quarter. The company was losing less money, which was progress but not ideal. Juniper would continue to lose money until the first quarter of 2000, the same time that the Nasdaq peaked, then sold off sharply.

From a high in March 2000, Juniper dropped 55% in two months.

Yet by this time Juniper was increasingly profitable. The company was on track to post a net profit of $147.9 million in 2000, enough to erase the net losses of the previous four years combined.

The stock regrouped and thrust 249% higher from a May low to October.

During the run-up, disciplined investors probably would’ve sold the stock for a triple-digit percentage gain at one of the dips below the 50-day line, especially if their original entry was October 1999, the first breakout at a 39.16 buy point.

The right time to sell, though, isn’t the right time to short a stock. It would be rare for those two situations to converge.

As IBD observes in its “Short Selling Home Study Program”: “If an investor sells a stock on the way up — the proper strategy — the stock may often have further to rise. Shorting at that juncture could prove painful.”

So when did the stock establish itself as a short? Juniper completed a head-and-shoulders pattern in December 2000.

The left shoulder peaked at 181.25 (1). The right shoulder’s high point was 168.50 (2). Note that the right shoulder was below the left shoulder, as it should be in a proper head-and-shoulders pattern.

The low of the left shoulder was 118.06. Although the right shoulder dipped below that low several times, it was the wrong time to short — too obvious.

The first correct short sale came around 114, when the stock regained and dived under the 10-week line.

Another correct short sale occurred around 50 (3) after the stock regained the 10-week line, then broke under it.

Bảy lý do tại sao bạn nên thử bán khống cổ phiếu

• DAVID SAITO-CHUNG
• 03:25 PM ET 10/28/2016

If you haven’t sold a stock short before, or you believe you never will, take a moment to think about the reasons why.

You may have more than one reason. The market has an upward bias, you say. (True.) Or, if your short sale goes bad, the losses are unlimited. (Theoretically, yes.) Maybe you don’t know anyone who’s good at it. Or you may feel it’s unpatriotic.

Whatever the reason, it’s never too late to try something new. The bull market today has lasted much longer than the typical bull run. For the next great bull run to arrive, the bear always must intrude and shake up the scene.

So a savvy investor keeps an open mind and seeks to expand his or her knowledge, wisdom and opportunities. Now that’s the American way.

Here are seven reasons why learning how to sell former big-market leaders short may in fact sharpen your trading acumen.

Reason No. 1: It elevates your chart-reading skills. To identify a head-and-shoulders pattern, you need to closely look at how a stock behaves and how volume changes on a week-to-week basis, and even on a daily one. Train your eyes to see signals that institutional investors are unloading shares urgently, or that they are not so eager to buy shares after a sharp pullback.

These insights also help you determine a timely exit from your long positions.

Reason No. 2: You become more savvy at spotting market-topping action. Keep an eye on the distribution-day count via the Big Picture column (Page B8 in the latest IBD Weekly.) See how the stock market leaders are behaving. Are they breaking down? Are they failing to make new highs? Former big winners eventually become the best short-selling candidates.

Reason No. 3: You build a healthy sense of skepticism. In 2000, everyone appeared to be an owner of tech stocks, and most thought they knew what they were doing. Optimism was sky high.

EMC, which recently merged with Dell Technologies (DVMT), rose brilliantly in the 1990s, then peaked in 2000. As EMC topped, it formed a five-month head-and-shoulders pattern that included three charges back up above the 10-week moving average, following an initial deep sell-off that started in late September.

The data-storage king presented a short-sale opportunity in the week ended Dec. 15, reversing from a gain to cross below the 10-week moving average, near 85 in heavy volume. The short could have been covered a week later, gaining as much as 50% to 60%.

Reason No. 4: You become more sensitive to market cycles, and learn how to think in a contrarian way. This can help you gain the courage to buy when the market has bottomed.

Reason No. 5: Short selling reinforces your discipline in limiting risk. It’s no different from buying stocks. Always have a sound exit strategy. Cut losses short at 8% or less. When the trade works, you must still have the discipline when the profit reaches 20% to 25%. The market-makers and funds will often come back into the stock to try to run in the shorts.

Reason No. 6: Counting bases becomes easier. Short sales work when you are focused on those that have been in long runs, rising 20% or more from base to base. A failed breakout from a late-stage base is a key IBD pattern for short selling.

Reason No. 7: You give yourself a chance to make money in down markets. Enough said?

Head-And-Shoulders Pattern Signals End Of Stock’s Run

• SCOTT STODDARD
• 04:13 PM ET 10/24/2012

Wealth-Making Patterns: Twelfth In A Series

Investors who have held onto a stock that has enjoyed a long run-up will eventually ask themselves: When is it time to sell?

The stock’s chart is the first place to look for sell signals.

One pattern that often marks a peak is the head and shoulders. IBD founder and Chairman William O’Neil called it one of the most reliable topping patterns in his book, “How to Make Money in Stocks.”

The pattern looks like the outline of a head and shoulders, with the right shoulder typically just below the left. Not only is it a warning to sell, but it also foreshadows a possible short-sale opportunity.

Here’s how it works: The left shoulder forms when the stock hits a high and then pulls back, sometimes bouncing off a support level such as the 50-day moving average. It then shoots up to a new high, forming the head: the ultimate peak. Then it drops sharply and wedges slightly upward to form the right shoulder.

Volume often rises as the pattern moves from left to right and selling picks up, and the stock usually becomes more volatile. In a classic head-and-shoulders pattern, the stock breaks down after forming the right shoulder.

Some try to short the stock when it falls below the “neckline” connecting the lows of both shoulders. But that sometimes doesn’t work. It’s best to wait until the stock rallies to its 50-day or 10-week line two to three times before attempting a short sale.

A head-and-shoulders top can take five to seven months or even longer to form, which is why it’s best viewed on a weekly chart.

Deckers Outdoor (DECK), the maker of Ugg boots, formed a head-and-shoulders pattern over four months from October through December of 2011 after rising nearly tenfold from its March 2009 low.

The stock ran up to 109.90 in the week of Oct. 14 and then pulled back near the 10-week line to shape the left shoulder 1.

Deckers soon resumed its uptrend, hitting a record high of 118.90. It retreated to just below its 10-week average over the next month. This formed the head 2.

The stock then poked back above its support line before breaking below it, forming the right shoulder 3.

In the week ended Feb. 24, it tried to retake its 10-week moving average, only to fall from the line in heavy volume 4. That triggered a short-sale point, although at that time the stock had made just one attempt to regain the 10-week line.

Note that only experienced chart readers should attempt a short sale. Also, short sales generally shouldn’t be attempted while the market is in a confirmed uptrend.