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Short-Selling: What are we looking for?

|Includes:Aeropostale, Inc. (ARO), FAZ, TZA

The current correction has been swift and we've profited nicely with inverse ETFs.  However, we much prefer to find short setups giving us the highest probability of gains.  The following charts will show what we are looking for.

ARO has been a stock we've mentioned in our Chartist Choice Daily and our Newsletter.  Since we've seen the stock breakdown a bit further we'd figure we'd release what we are looking for in shorts.

As you can see we need to see a BIG run up on the left side of the chart.  The larger the better, but it should be at least 100%.  Secondly, if you notice we don't try to call a top in a stock.  If you were calling tops in June, July, August, September, October, and November you were burned.  We want the highest possibility of a breakdown without a surprise move higher.  As you can see ARO ripped off the initial move down shaking out shorts.  We look for stocks who made a top at least 5 months ago as this time allows for weak shorts to be shaken out and longs to believe the stock has bottomed.  The next chart will show a closer look at the current action.

Price now under the 50dma confirms the weakness in the stock.  A word of caution is the 200dma is not rolling over just yet.  While the 200dma is not rolling over it doesn't negate the pattern.  It is still valid with a slight flaw.

When shorting stocks it is wise use a tight stop and take profits quickly.

Disclosure: Short ARO Long FAZ, TZA
Stocks: ARO, FAZ, TZA