How and Why Short Selling Works

Financial market report for February 2, 2011

1) … Introduction
In as much as the stock market, VT, is topping out and turning lower, one should consider investing in gold, GLD, which I recommend; or one should consider short selling. Note how the chart of gold shows that it is breaking out from a consolidation triangle. Gold in time past has been taken higher by rising commodity currencies, but now it is likely to be driven higher by falling stock values and a rising investment demand for a safe haven investment, in what is to become the age of deleveraging and the age of disinvestment, that will see competitive currency devaluations at the hands of the FX currency traders.

2) … Short selling works when an investment crests and turns lower.
Basic material stocks, IYM, have been volatile, as the market is indeed peaking, as suggested by the fall lower in automobile stocks, and the strong fall lower in transportation stocks, IYT, and as the basic material stocks are driven by Commodity Currencies, CCX.

Basic material stocks, IYM, are forming a megaphone and a broadening top, at their market top. Street Authority relates, that when you see the broadening top, the market will eventually drop.

 

Coal, KOL, companies entered a strong sell off and a strong recover; and today, like many stocks manifested a bearish harami at what is likely the crest of an Elliott Wave 2 up and ready to commence an Elliott Wave 3 Down.  

Note the similarities in wave structure between Commodity Currencies and Coal; this gives extra confidence to sell coal short.

BHP Billiton, BHP, moves vigorously, as is seen in the length between the 3 up and 4 down, moving between 92 and 82; this is largely due to its nature as a premier commodity stock; and note how the recent wave up, which I have labeled 2, could be considered as a double top 5.

 

And speaking of short selling opportunities, the 200% of the Russell 2000, URTY, closed in the middle of its broadening top pattern. All I can say is “lookout below”

Manufactured Housing Manufacturer: Cavco Industries, CVCO, is too far gone to effectively short sell.

Airlines, FAA, turned lower with the announcement of QE 2 By Ben Bernanke; its fall lower means the market has turned lower and better prospects are available elsewhere. Note the dark cloud covering candlestick that gave a strong go ahead to sell these short. Also note how these have entered both an Elliott Wave 3 Down and an Elliott 3 of 3 Wave Down. Also note how these fell lower today as there was little buying interest in anything today after yesterday’s run-up in the market.

Sweden, EWD, moves vigorously with the Euro, FXE, so get set for a major move down.

3) Today’s market activity was mostly quiet but the market saw significant transactions.
S&P California Municipal Bonds, CMF, manifested what may be an evening star.

Solar, TAN, moved 5.3% higher, taking GT Solar, SOLR, 2.4% higher, making it a good short seller. The rise in TAN, gave a rise to QCLN and ICLN. If the fall coming to solar stocks is like the former fall, being short GT Solar will be quite rewarding.    

Utility shares, XLU, entered an Elliott Wave 3 Down today, after having turned parabolically lower and then having bounced up. This action often precedes the markets as a whole turning lower.

Debt laden NextEra Energy, NEE, a terrifically debt laden utility, formerly Florida Power and Light, manifested a long legged doji.

Agriculture commodities, JJA, rose parabolically showing three white soldiers, suggesting a fall lower; those invested in futures may want to close out and take profits and wait for another leg up.

US Commodities, DJP, has a wave structure similar to Agriculture commodities, JJA.

The Commodity Livestock ETN, COW. manifested bearish engulfing, communicating a likely end to rally.

Networking shares, IGN, manifested three white solders suggesting a good short selling opportuntiy.

The strong rise in Internet Retail, HHH, is to be sold short.

If I were into short selling, and I am not because I’m invested in gold, I would have sold US Brent Oil, BNO, short today.

Retail, XRT, fell 2% today; its fall communicates that a overall bear market will be commencing soon.

Environmental Services, EVX, manifested bearish engulfing, portending that a fall lower is imminent Clean Harbors, CLH; making it an excellent short selling opportunity. Stocks in this sector rose strongly on a Ben Bernanke flood of liquidity. Mr Bernanke wanted inflation, so he got it; now the market belongs to the short sellers; and to those invested in gold the chart of gold, GLD, suggests a possible breakout at this time with it rising out of a falling wedge to close at 130.45.

American Axle, AXL; while most stocks were stable today, American Axle fell 6.08% lower.  

Other automotive stocks falling lower include Autoliv, ALV, falling 3.54%, Magna International, MGA, falling 5.51%, Tenneco Automotive, TEN, falling 6.37%, TRW Automotive, TRW, falling, 3.2%, Ford, F, falling 3.08%, and Johnson Controls, JCI. falling 2.78%

Ford and Johnson Controls are automotive components of the Morgan Stanley Cyclical Index, $CYC; their fall lower suggests an end to both an investment cycle and an economic cycle. The sell off in stocks that comes with a fall in the Morgan Stanley Cyclical Index is going to severe, as it represents the entrance into an Elliott Wave 3 Down, in both the Morgan Stanley Cyclical Index and in the S&P as seen in the chart S&P Weekly, SPY Weekly, with SPY putting in a Wave 2 high of 130.74 on February 1, 2010.   

Ford, F; while most stocks were stable today, Ford, fell 3.08% lower.

Johnson Controls, JCI; while most stocks were stable today, Johnson Controls fell 2.78% lower.

4) … Conclusion
I hope this information on short selling has been helpful.

I am invested in gold, that is  I have bought and taken personal possession of gold, as I perceive it to be the sovereign currency, and believe it will soar dramatically as competitive currency devaluation gets underway at the hands of the FX currency traders   

Symbols: DJP, COW, BHP, CCX, BNO, CMF, CVCO, EVX, FAA, GLD. HHH, IGN, IYM, JJA, KOL, NEE, SOLR, URTY, XLU, XRT, AXL, F, JCI, ALV, MGA, TEN, TRW, EWD, VT, SPY,

Keywords:  Morgan Stanley Cyclical Index, Competitive Currency Devaluation, Competitive Currency Deflation, Age of Deleveraging.