Kacher Chris - Short selling with the ONeil disciples: turn to the dark side of trading

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Copyright 2015 by Gil Morales and Dr. Chris Kacher. All rights reserved.

Published by John Wiley & Sons, Inc., Hoboken, New Jersey.

Published simultaneously in Canada.

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Library of Congress Cataloging-in-Publication Data:

Morales, Gil, 1959

[How to make money selling stocks short]

Short-selling with the O'Neil disciples : turn to the dark side of trading / Gil Morales, Dr. Chris Kacher.

pages cm. (Wiley trading series)

Includes index.

ISBN 978-1-118-97097-3 (paperback)

1. Short-selling. 2. Stocks. 3. Speculation. I. Kacher, Chris. II. O'Neil, William J. How to make money selling stocks short. III. Title.

HG6041.O64 2015

332.63228 dc23

2014047580

As the old aphorism says, When life gives you lemons, make lemonade. When the stock market gives you lemons, one should make lemonade by selling short. This book is dedicated to all those who seek to improve and transform themselves by taking the lemons that life throws at them and turning them into lemonade.

This book is intended as a follow-up and updated second edition of the book I originally ghost-wrote in 2004, How to Make Money Selling Stocks Short by William J. O'Neil with Gil Morales (John Wiley & Sons, October 2004). While that book has been a strong seller and does a reasonable job of outlining the basic concepts behind the art of short-selling, it is woefully inadequate in terms of its coverage of the basic mechanics of short-selling at the granular level. In that book, we relied entirely on weekly charts, and while weekly charts most certainly have their purpose in helping to identify the macro-patterns that develop in short-sale candidate stocks, it is on the daily chart that we determine the precise point within a stock's pattern at which to sell it short. Thus, the fact that the 2004 short-selling book did not contain any daily charts meant that it essentially ignored the most important aspects of short-selling. What is radically different about this book is that it relies mostly on daily charts and gives readers a much more detailed and realistic view of just how the short-selling process can play out. This is the essential difference between this book and the last, and one which I believe makes a huge difference in terms of conveying a true sense and understanding of how short-selling works at the point of impact (e.g., the precise point or points at which the short-sale trade can be executed). This can only be seen on the daily chart.

In this book, we update and modify what I see as a fluid, evolving set of short-selling principles rather than a static, dogmatic one. In the process, some of the old short-selling golden rules described in both How to Make Money Selling Stocks Short and of the first book that I wrote with my friend and colleague Chris Kacher, Trade Like an O'Neil Disciple: How We Made 18,000% in the Stock Market (John Wiley & Sons, 2010), have been exposed as myths. One major myth about short-selling is that one can only short stocks during a bear market. That is simply not true, and the objective material in this book more than blows that premise out of the water. So it is that as I continue to trade on the short side of the market and gain more experience, my objective research and post-analysis of my own short-sale trading as a matter of course reveals more sides to the multifaceted diamond that short-selling, when done right, can be.

One of the major new developments in my work and research on the short side is the use of fractal short-selling patterns. My colleague Chris Kacher has frequently brought up the idea of the stock market's technical action as being of a highly fractal nature, with each observable pattern breaking down into and containing within its structure smaller patterns and sub-patterns. I must give credit to Chris in helping to inspire my clarification of what I was seeing on my charts, and his concept of a fractal market is shown to be quite valid on the short side. Fractal technicals can be thought of in simple terms by taking a basic cup-with-handle base formation on a weekly chart and then seeing that the handle of this pattern in turn consists of another, smaller or fractal cup-with-handle formation. If we then look at a 60-minute chart of the same pattern, we might notice that the handle of the fractal cup-with-handle in turn consists of an even smaller cup-with-handle formation. This is a basic illustration of what we mean when we talk about fractal chart patterns.

Sometimes, however, the fractal nature of a pattern can also be observed on a single time-frame, such as the example of a smaller head-and-shoulders formation forming within the head of a larger head-and-shoulders formation. In this case, the fractal components can all be seen in one time-frame on the weekly chart. In any case, the use of fractal chart formations can be very useful in helping one exploit a top in a stock long before the large head-and-shoulders formation becomes obvious on the weekly chart. This also underscores why the sole use of weekly charts in short-selling, and in particular in trying to teach short-selling, is highly deficient. This book corrects all of that.