Why I hate shorting this market

Posted by downtowntrader | 3/11/2010 11:46:00 PM View Comments

I like to consider myself pretty flexible when it comes to trading. I am comfortable going long or short as the market dictates, and have been successful on both sides. However, over the past year, I have noticed that shorting as a SWING trade has been extremely difficult. Of course, the markets have been in a spectacular rally in which I have consistently participated in, but even when the markets have been overbought, or in a correction, I have found it much harder to short than go long. Now, I'm not saying shorting is impossible, but trading the long side has been much easier. And to clarify, I am talking swing trading, not day trading.

Basically the markets have been punishing market participants who are clinging to their bearish thesis much like it was punishing dip buyers unable to believe how severe the markets were dropping in the midst of the financial crisis in 2008-2009. Every time the markets begin to breakdown, it only serves to suck in bears and then proceeds to rip their faces off.

A good example of this action can be found in Western Digital Corp. (Public, NYSE:WDC). This stock has been weak in a strong tape. With the markets overbought, a prudent trader could look to short a weak stock in the event the markets begin to pullback from resistance levels. WDC has a very weak looking chart, showing a larger head and shoulders topping pattern with a smaller one forming the right side. Volume has been picking up on the selling as well. Traders who were shorting on March 10th were probably feeling comfortable that WDC was starting to drop under its base on increasing volume. They were really feeling good the next morning as WDC gapped under the entire base, but by the end of the day, WDC had formed a high volume reversal hammer and closed back in its base. While one day a trend does not make, this is the type of action that has been really frustrating for bears. Even though this may end up playing out to the downside, I would be nervous if I was short this name. The reversal had the highest volume day on the chart and showed strong support at these levels.

The markets continue to perform very well, and the price action in several sectors is painting a picture of strength. As a trader, I realized I was having subpar results shorting, so I have been reducing the amount of shorts I take and most likely will wait for the markets to break down under their 50 day moving averages before taking that side seriously. I'm not interested in fighting the tape, and this tape has really been sticking it to the bears.

Good Trading,


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