Trade Like an O'Neil Disciple: How We Made 18,000% in the Stock Market

6.2. SHORT SALE SET-UPS

The key to successful short-selling lies in waiting for the proper window of opportunity to open. This requires waiting and watching as potential short-sale formations that begin to form complete their chart patterns. There are three primary short-selling set-ups that we use, the head & shoulders top, the late-stage-failed-base, and the punchbowl of death double-top. Each has its own unique characteristics, but sometimes patterns can overlap and can be therefore be interpreted as a "hybrid" of two or even all three of these formations, as we will see later in this chapter. Ultimately, the exact shape and label we assign to a particular topping formation is less important than the actual price/volume action within the pattern that indicates the stock is very likely under systematic and sustained distribution.

One feature that each of these topping formations and short-selling set-ups have in common is a sharp downside price break and breakdown on massive volume, which occurs right off the peak of a sharp upside price run of several months or more. Heavy volume selling off the top after a sustained uptrend usually signals the first wave of distribution in a former market leader, and it is at this point that such a stock should be placed on one's short-selling watch list as it potentially continues to form some sort of valid topping formation. Screening for stocks with heavy-volume price breaks on a daily and weekly basis is the most effective way to catch ...