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Alkermes (ALKS:Nasdaq): When to Wait and Watch

At a training session a while back I asked the crowd about their trading habits. Specifically, I wanted to know how often they sold short. To my amazement, less than 25% said they ever had. This was not a group of typical buy-and-hold investors. These were hard-core traders. But even with all that experience, many avoided the art of short-selling.

Obscure market rules and Wall Street happy talk discouraged short-selling for years. Furthermore, the upside-down logic required to sell short was too mysterious for many retail traders.

Times have changed with the advent of online trading and instant execution. Getting filled on a short sale is just as easy as buying a stock. Gone are the days when you had to plead with your broker to release shares from inventory just so you could borrow them. And the Securities and Exchange Commission is finally considering abolition of the short-sale uptick rule.

Here are three quick tips to improve your odds when selling short:

  • First, never chase a selloff. The best short sales come at the end of weak rallies.

  • Second, sell short in less volatile markets. Tech stocks carry high short interest (outstanding short sales) and are vulnerable to nasty squeezes.

  • Finally, take a short position in a well-established downtrend, rather than trying to pick tops in strong rallies.

Timing a short sale requires more precision than buying a stock for a trade. True believers, contrarian traders and old-fashioned bad luck hold up lousy stocks that should break down. Help your cause by finding bearish patterns on both the daily and 60-minute charts. Even then, keep stops tight and don't hesitate to jump ship if the trade doesn't move quickly in your favor.

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