How to Read the Market for Short-Sell Signals

What started out as a hopeful week for investors turned sour Thursday as the markets sold off, leaving investors running for the sell button. The Dow, NASDAQ, and S&P 500 all triggered short-sells last week. The Dow staged a five-waves up pattern, and then sold off as shown in the blue box.  This sell-off is called a First Thrust Down. 

The Dow then attempted to rally near its 50-day moving average in an attempt called a Pullback Off Lows, shown by the pink line.  The Pullback Off Lows pattern is a classic short-sell set-up, something investors keep their eyes open for to profit from a falling market. A break below the pink line triggers a short-sell ― that's just what happened Thursday.

As far as the NASDAQ is concerned, it too staged a five-waves up pattern.  After finding support at its 50-day moving average, it rallied, but only back to resistance at a prior high, thus forming a double top.  A break below the pink upward trend line triggers a short-sell.

These are classic short-sell patterns ― First Thrust Down for the Dow and Change In Trend (up to down) for the NASDAQ.

Finding Profitable Trades in This Market

Now that the indexes have triggered short-sell trades, we want to be looking for individual top stocks to buy that have formed the same short-sell patterns. 90% of successful investing in stocks is simply trading in tandem with the market.

The market talks to us through patterns, and it's talking right now. We want to be going short on stocks that have patterns similar to the indexes. When the indexes trigger a short-sell trade, we want to be going short in set-ups that are also triggering.  So here are some top stocks for 2010 that had similar set-ups to the indexes that triggered Thursday:

With AAPL and CTRP it's all about a downside break of the pink line. It's all you need to know to take a trade.  Notice how they mirror the chart of the NASDAQ?

Now let's take a look at these two top stocks with Thursday's action included. As you can see, both stocks triggered by breaking below the pink line.

First Thrust Down Short Sell Patterns

With NILE and BUCY it's all about the pink line ― a downside break a short sell.  Notice how the patterns are similar to the Dow?

Finally, let's take a look at these two top stocks with Thursday's action included ― again, both triggered.

While most investors scramble for a plan when the market turns south, you can sit back, relax, and let the market tell you what you should be doing to make a profitable trade. While the signs might not always be as clear as Thursday's were, knowing the patterns to look for can protect your portfolio from a big slide down the road. As always, we'll be on the lookout for the market's moves.