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When we consider a stock for short selling, there are two primary technical set ups we look for. Predicting the top in a stock or index is usually much more difficult than finding bottoms, since momentum, news, or “euphoria” can keep a stock or index in overbought territory for a long time. Too many shorts in a specific stock can also continue a rally as stop losses on short positions are triggered by relatively light buying pressure. For those reasons, it’s important to wait for confirmation prior to entering a short. We also look for high liquidity stocks, meaning those that trade over 1 million shares a day. Lower volume stocks are much easier to trigger short squeezes in, and since we’re literally borrowing a long’s shares to sell short with, we want to make sure there’s plenty of shares available to borrow for our short, and not risk having those shares called back from us.


The first trading set up we look for in a potential short sale candidate is negative divergences while a stock is overbought, and a break of a short term support level for confirmation. It’s very important to look at technical indicators from each of the 3 technical categories (momentum, trend, and money/volume flow). While momentum indicators may temporarily turn down, if money/volume flow remain positive with a strong trend, momentum only indicators may give a false sell signal.

The AMZN chart below shows a classic set of short term negative divergences, with confirmation provided through a break of a key short term support level on rising volume. First, note the short term double top with volume much lighter the second time the peak was reached. Virtually all indicators were reading overbought on the stock at the time, and the first signal of a potential short was the ADX, a trend indicator, showing a weakening trend as the +DI crossed under the ADX line while the -DI turned up. Please keep in mind the direction of the black ADX line does not show the direction of the trend, just the strength of the current trend.

Negative divergences formed on RSI, Fast Stochastics, and Slow Stochastics, three momentum indicators. There was also a clear negative divergence on the MFI, a money flow indicator. The confirmation for the short entry was a break of the short term 42.00 support level on dramatically rising sell side volume. A short entry at 41.80 returned a 10% gain in 8 trading days. In this instance, a stop loss could have been set slightly above the area of the double top. This was a classic short term double top set up, full of negative divergences from all three categories of indicators, and confirmed with a break of support on rising volume.

Shorting a stock in a trading box

One of the safer short entries is in a stock that is lacking a definitive trend, and ends up in a trading box. The upper line of that box provides a growing area of resistance that increases in strength each time the stock fails to break over that range. The risk to reward is in the favor of the short entry, since a relatively tight stop can be used over the resistance line. Technical indicators play less of a role in this type of trade, since the entry and exit are determined by areas of resistance and support defined by the trading box.

In the QCOM chart below, note that the stock was lacking a definitive trend for an extended period of time. The first red circle shows the area of resistance, with the first green circle showing the first area of support. This defines the trading box, although on two occasions, the price actually dropped below first support. The second red circle indicates a short entry after QCOM failed at an attempt to break over the 40.00 resistance a few days prior. The second green circle shows where the exit from the short would occur as the stock bounced off support. The third red circle shows a second short entry at the resistance line, while the third green circle shows an area to cover at support. The trading box formed by 40.00 resistance, and 37.00 support offered two short term trading opportunities from the short side, with a relatively safe stop being set at 40.60.

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6. Trend Trading
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8. Trading Strategy in Forex Trading
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