The 10-Week MA Pullback for Short Selling

This article explores a contrarian application of the 10-week MA pullback strategy, focusing on short selling. While the classic strategy is a long-only approach, this variation looks to capitalize on bounces to the 10-week MA in established downtrends. The idea is to short stocks that have bounced to their 10-week MA and are likely to resume their downtrend.

Entry Rules

The entry for this strategy is the mirror image of the long strategy. We are looking for stocks that are in a confirmed Stage 4 downtrend, with the 10-week MA trending firmly below the 40-week MA, and both should be sloping downwards. The initial bounce to the 10-week MA is often the most reliable. The bounce should occur on noticeably lower volume than the prior decline, indicating that the buying pressure is not significant. The ideal entry is triggered by a bearish reversal candlestick pattern, such as a shooting star or a bearish engulfing candle, on the weekly chart. Confirmation is key; we want to see the stock trade and close below the low of that reversal candle.

Exit Rules

The primary exit signal is a weekly close above the 10-week moving average. This indicates that the intermediate-term trend may be changing. A more aggressive exit strategy is to use a trailing stop-loss, such as a 2-bar high on the daily chart or a close above the 20-day EMA.

Profit Targets

An initial profit target should be set at a minimum of a 2:1 risk/reward ratio. A more dynamic approach is to use a trailing stop-loss to capture a larger portion of the trend. Another effective profit target is the prior low of the stock.

Stop Loss Placement

For short selling, the stop-loss should be placed above the high of the entry week's candle. A more conservative stop-loss placement would be a weekly close above the 10-week MA.

Position Sizing

Risk no more than 1% of your trading capital on a single trade.

Risk Management

Short selling is inherently riskier than buying long. It is important to be aware of the risks involved and to use a tight stop-loss to protect your capital.

Trade Management

Active trade management is key. Monitor the stock's price action and adjust your stop-loss as the trade moves in your favor.

Psychology

Short selling requires a contrarian mindset. You are selling when others are buying. It also requires the discipline to stick to your trading plan and avoid getting squeezed out of a trade.