Scanning And Charting

*Bob Iaccino, Chief Market Strategist and Co-Founder of Path Trading Partners, joins us live every Thursday from 9am ET, as our trading strategies educator. With 30 years' experience working as an active investor in equities, commodities, futures and FX there are few better to talk on the subject of risk management.

Bob has developed a method for breaking down his key fundamentals of risk management, in a way that he thinks retail traders can understand and use to get actionable insights to bring into their own trading. Below are some excerpts of Bob’s thoughts from a recent live session.

Let’s look at the screening criteria to find short candidates. Think of these as filters to sift through hundreds of stocks and land on a few solid options.

1. High Price-to-Earnings (P/E) Ratio: Ideally, we’re looking for stocks with a P/E ratio above 40, though 50 is even better. This is because overvalued stocks are more prone to corrections, especially in a declining trend.
2. Gross Margins Under 30%: Gross margins below 30% often indicate operational inefficiency. This means the company may struggle with cost management and could face financial instability if revenues dip.
3. Operating Margins Below 10%: Low operating margins combined with weak gross margins suggest the company is struggling to turn sales into profits. This is a red flag for potential short trades as these stocks tend to be more vulnerable in bear markets.
4. Negative Insider Transactions: This is an optional but valuable filter. Insider selling often hints that those closest to the company foresee trouble. While not always a foolproof indicator, seeing insiders selling can confirm our bearish view.
5. Short Float Over 5%: This shows us that other traders are already betting against the stock. When the short interest is above 5%, we know that we’re not the only ones seeing the downside potential, which can often reinforce our setup.

Now that we’ve identified stocks that meet our screening criteria, here are some practical steps to help manage your short positions safely.

• Look for Rallies that Stall: Rather than jumping in at the bottom, try to short into a rally that is losing momentum. This reduces the likelihood of getting caught in a sharp rebound.
• Set Profit Targets: Unlike long trades, where you might hold for an extended uptrend, short trades should have clear profit targets. These targets are points where we either take full or partial profits or tighten our stops to lock in gains.
• Consider the Borrowing Cost: Remember, when you short, you’re borrowing the stock, which comes with costs. These fees eat into your profits, so it’s wise to treat short positions as shorter-term trades.

Let’s put these principles into action. Using a stock screener like Finviz, we screened for small-cap stocks that matched our shorting criteria. Here are a couple of examples:

1. Cross Country Healthcare (CCRN): This stock is trading below both its 200-day and 50-day moving averages and shows weak gross and operating margins. Look for a rally up to resistance levels (50-day or 8-day moving averages) and then a rejection to enter short. In our recent setup, we saw a 7.1% downward move from our short entry.
2. Cipher Mining (CIFR): Also below both its key moving averages, Cipher Mining displayed a double-top pattern—a bearish formation—suggesting a target around $2.92. Once it breaks below the recent low, it’s primed for a potential short move.
3. Savers Value Village (SVV): Currently trading under $10 and below the 50-day moving average, SVV lacks positive momentum and has consistently weak fundamentals. It’s a good candidate for a short as it heads lower.

When scanning for short opportunities, it’s easy to get influenced by hype or rumors. From Reddit threads to Uber driver stock tips, these anecdotes are usually speculative and lack actionable value. Instead, base your decisions on what is verifiably true: price action and technical indicators. As traders, our focus should be on cold, hard data—not wishful thinking or hearsay.

Final Thoughts

Short selling is an advanced strategy that requires careful planning and an understanding of market trends. By sticking to a consistent screening process and focusing on technical weakness, you can improve your chances of success. Remember, always be prepared to act at your target levels and watch for the hidden costs of short selling, like borrowing fees.

Live Sessions (hereafter referred to as the “Content”) are produced by TradeZero. The Content may include the views and opinions of TradeZero and a third-party participant, Bob Iaccino. Bob Iaccino is compensated by TradeZero for participating in the Content. Mr. Iaccino’s trading experiences and accomplishments are unique, and your trading results may vary substantially from his. TradeZero is not responsible for and neither affirms nor endorses any of Mr. Iaccino’s views or opinions expressed in the Content. TradeZero makes no representations or warranties with respect to the accuracy of the Content or information available through any referenced or linked third party sites. The Content has been made available for informational and educational purposes only and should not be considered trading or investment advice or a recommendation as to any security.

Trading securities can involve high risk and potential loss of funds. Furthermore, trading on margin is for experienced investors and traders only as the amount you may lose can be greater than your initial investment. Likewise, short selling as a securities trading strategy is extremely risky and can lead to potentially unlimited losses. Options trading is not suitable for all investors as it can involve risk that may expose investors to significant losses. Please read the Characteristics and Risk of Standardized Options, also known as the options disclosure document (ODD) at https://www.theocc.com/Company-Information/Documents-and-Archives/Options-Disclosure-Document before deciding to engage in options trading.

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