The Short Side Of The Market

The Differences Between Buying Long and Selling Short


Stocks move upward in fairly typical patterns that occasionally alternate and shift from Stairstep to Peaks and Valleys Candlestick Patterns for instance. But the sell side of the market can often drop like a dead weight. An uptrend looks like a gentle slope upward until the peak which is often more steep, but the downside frequently looks like a sheer cliff. Stocks will plummet far faster than they rise. This makes Selling Short more profitable in the short run, but also much riskier because of the momentum behind the runs.

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It usually takes a novice trader about twice as long to learn to Sell Short, as it does to learn how to buy long. For Long-Term Investors who have been taught that Selling Short is “bad” for the market, the length of time can be even longer. 

Selling Short is not bad for the market. It is actually a good thing. If you were to look at a stock chart of the Dow 30 Industrial Average since it began over 100 years ago, you would see that during all that time the trend has been up. Intermittently, there have been brief periods where the market moved down, but it always returns to moving up. The periods where it moves down are correction phases that are necessary to sustain the long term uptrend. These corrections adjust the Angle of Ascent™ of the market uptrend keeping it stable and sustainable. Without them, the market could not sustain a very long upward move. 

Selling Short has been around since the earliest days of the Stock Market. It is not something new but something that is an integral part of the Stock Market, and it provides a means of making money during the normal and necessary Market Corrections.
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The market corrects because prices become speculative, and no longer represent the true value of the stock in relation to its company’s growth potential. As the price falls, the value of the company and the value of the stock come back into sync or harmony. 

Many traders enjoy the fast paced atmosphere of Selling Short, but some of the basic rules of trading are different for the sell side of the market. One thing that has changed recently is that there is no longer an Uptick Rule. This rule had been enacted after the market collapse of 1929 as a means of controlling Selling Short, to keep it from causing market collapses. In recent years with the advent of computer programs that initiate curbs, trading is halted on a stock that is too speculative. The Securities and Exchange Commission SEC deemed the Uptick Rule no longer necessary, and after two years of testing it was eliminated. 

Some of the differences between Buying Long and Selling Short are the following:

1. You will see more stocks dropping on lower Volume, and stocks dropping day after day in a momentum run down. If you look at charts you will see that the upside is gradual and that the down side is much steeper. This is one of the reasons Downtrending markets last a short period of time, while Uptrending markets last for long periods of time. Most traders are simply more comfortable with the long side and holding as a stock moves up, and to them Selling Short may seem weird and confusing.
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2. What makes markets surge or move upward is energy, enthusiasm, and buyers. What makes stocks drop is uncertainty, indifference, despair, and panic. Stocks run up because of energy. Stocks can drop due to lack of energy. a dull market is at risk of dropping from its own weight of indifference. Stocks do not always need bad news to drop. They can drop because of a lack of interest.

3. Weak support will collapse without much effort. Moderate support will buckle if the stock has bad fundamentals or is in a weaker sector. Strong support will hold for the most part when the market is not in a Great Bear Market.

Summary

Corrections in the market adjust to overextended patterns in sectors, which have been over heated and running too long on the overbought side.

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Trade Wisely,
Martha Stokes CMT

Chartered Market Technician
Instructor and Developer of TechniTrader® Stock and Option Courses
TechniTrader DVDS with every course.

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