Shorting isn't easy. First of all, your mindset has to switch the other way. Having a negative outlook on stocks or markets is anathema to our normal approach. But it can be a useful tool in the right environment. Here's what we saw on Workday stock that made it a short candidate.
A Sell Signal Isn't The Same As A Short Signal
In hindsight, it is easy to look at a stock's top and say that's the time to short. It doesn't always work that way in real time. Take Workday: Sure, if you had gone short at the top (1) you would be looking at a 24% gain. But what was your signal in real time? The reversal on WDAY stock? Plenty of those happened prior to the top.
Even after Workday stock started moving lower, how would you know it wasn't just another base forming?
When we choose stocks to buy, we look for evidence that they can move higher. A prior uptrend of 30% or more checks that box. When looking at a short, we like to see a downtrend already established over weeks if not months. One easy indicator is the trend of the 50-day moving average line. WDAY stock started the year with the 50-day line rolling over (2).
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Next, you'd like to see rally attempts fail. That can give you a sense that a stock can't sustain strength for long. When Workday stock struggled to stay above its 200-day line or even close above its 21-day line, that's a stock demonstrating weakness (3). We don't necessarily look at an undercut of lows as a place to start a short (4). Those signals can often be too obvious and lead to shakeouts.
Swing Trading Example: Workday Stock
So what signal did we use with Workday stock? Another rally attempt occurred in WDAY stock but found resistance at the 200-day moving average line (5). We didn't send the short alert on that day, however. The close was high in the range so we wanted a little more evidence of weakness. Plus, we had a follow-through day in the market the day before. It's not typical to short in a nascent rally but there seemed to be a plethora of short setups and a paucity of sound bases for buying.
However, weakness hit the market indexes and WDAY stock the next day and it joined SwingTrader as a short idea (6). Our goal was to take profits quickly, an even more important rule with shorting.
We covered a third of the position the next day with a 3.5% gain on the position after Workday stock opened lower (7). With a 6% target for our next third of profit-taking, WDAY stock nearly reached that profit level later the same day.
After a pause for a few days, the market indexes seemed to get renewed life. The Nasdaq composite saw large gains with heavy volume and our 5% profit evaporated on a rally in WDAY stock, so we covered the rest (8) to keep the trade profitable. It was a small gain, but in a market where losses are more common, it helped with our current outperformance.
More details on past trades are accessible to subscribers and trialists to SwingTrader. Free trials are available. Follow Nielsen on Twitter at @IBD_JNielsen.
