Things You'll Need:
- Stock account capable of short selling stocks.
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Step 1
The first thing to look for is a stock in an over all downtrend. Trends in a general direction tend to continue in that general direction. A downtrend is called "distribution", as the shares are being distributed by those who were holding them.
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Step 2
Look for a stock that has gone below its 200-day Moving Average. This is one of the major moving averages used by investors to gauge a stock's move. Because it averages the prices for 200 days, it doesn't react very much to small fluctuations in the price. This gives a very stable overall view of the direction of the stock.
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Step 3
Look for a stock that has missed quarterly estimates in the last day or so. It usually takes Wall Street analysts a day or so to release their reports about why estimates were missed. The majority of the selling-off of the stock is done after brokers receive these reports and tell their clients about the news.
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Step 4
In the fourth quarter of the year, look for stocks that are trading near their 52-week low. Mutual funds want to sell stocks that they can book a loss on near the end of the year to reap the tax benefits for it. Therefore, these stocks tend to go even lower before the end of the year.
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Step 5
Look for stocks where more than one or two insiders are selling in large quantities. This could signify worse things to come. One thing to note, though, is that often insiders do regular sales of a same quantity as extra income. So if you see a couple thousand shares or so being sold regularly every 3 months by an individual, this may not be the sign that we are looking for here. Look for irregular sales by multiple individuals in the recent past.
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Step 6
Declining trends in the sector that the company is in will usually bring the price of a decent company's stock down with it, even though said company is sound. Institutional investors like to take a broad view of the market and have many reasons to be concerned about sector performance.
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Step 7
Deteriorating fundamentals quarter-by-quarter are another good thing to watch for. So is an increase in inventories or accounts receivables. These both are indicative of poor company performance and usually precede a sharp drop in share price.
