SSS - More Thoughts on the Short-Side for Friday October 13th

Published : October 14 2011 at 11:43 ET

The market's action on this almost bizarre straight-up rally off the lows of almost two weeks ago has been exceptional, as can easily be seen if one looks at a chart of the NASDAQ Composite, instance.

When setting stops for any short-sale trades we outline in these reports, keep in mind that we always use a maximum 3-5% upside stop on short positions, regardless of where the moving averages are. Sometimes, if one prefers to be more aggressive or more active, using the high of the day on the day you are shorting into a rally can be effective, but this all depends on one's own personal risk profile. "Know thyself!" is the first rule of trading. Also, for newer members, the purpose of all VoSI alerts is to outline a situation or trade for you, and then let you decide how to handle the trade given your own specific preferences and risk tolerance. We all have our own unique styles, and we believe that learning by doing is the best path, while handing you a fish to filet, as it were. We can hand you a fish, but you had better know how to cook it. If you are new to short-selling, you should read "How to Make Money Selling Stocks Short" or buy the new IBD short-selling course, we think it is invaluable, especially when Bill O'Neil annotates the short-selling examples himself. We don't make a dime off of either, but we believe you should buy 'em both. And as you are learning, take small positions. Only risk maybe 10% of your account value or less. Leave the 400% intra-day "up against the wall" stuff to Gil.

The market's rally over the past few days illustrates quite clearly how the short side can cause one headaches, but persistence is often required. Not many have the requisite psychology, and some might say you have to be downright crazy to short. In that regard, Gil might qualify while Dr. K takes what some might consider a more "sane" approach and prefers to remain less aggressive, using mostly ETFs on the short side.

We like the set-ups in BIDU, GMCR, and also FOSL here, and think AAPL should be monitored closely. Today's action looks a bit like the old "abandoned baby" "island-gap" thing, but then so was its move of two days ago. Maybe the problem with AAPL's island gap moves is that everyone sees them, and everyone knows what an island gap is. All we know is that if you are going to play the short side then you should have some large "cojones," although we might agree more closely with Betty White when she discusses what part of the human anatomy truly deserves to be associated with concepts of "toughness" or a swashbuckling nature:

The market looks tired here, but someone could still hand it a Red Bull before the close, so if you are shorting into this rally, keep your stops to a MAX of 3-5%, and be willing to come back to things on the short side as and if their rallies do begin to fail.

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