Don't Get Caught on the "Short" Side of the Stick

Bears vs. bulls? The battle between the two has never been more intense. Since the birth of online trading, the market has seen an intense overall volume increase. With that, came an even stronger battle between the two sides. Shorting a stock is simply doing the opposite of buying a stock. You are essentially selling the stock before you own it, in other words borrowing it from you broker, with the agreement you will repay them those shares by rebuying them. By rebuying at a lower price you are able to secure the profit difference between your buy price and that of which you originally "sold" it for. Today was a prime example of the bears taking charge of a market that has been rising for weeks. How do we recognize a bear market rally? The keys to recognizing this are to keep an eye on volume and ask vs. bid levels. The first thing that shows a bearish rise is by analyzing the volume vs. its 10 day average. When a stock is up 6% mid-day on 1/8th the average you know something is off. It may appear there are just a ton of buyers but it can be deceiving. How do we tell if its truly the buyers or not? The next thing to check is the ask vs. bid numbers. Today BHMP llc recognized that Capital One (COF) was moving on low volume and small bid prices. The average ask price at any given price was 10X the number of  bids, yet it was still rising. The sellers were lifting there shares to sell at a higher price while the bulls chased the stock. Once we saw the market peaking we applied a short that we knew would pay off near close. As you can see profit takers took over at close, the short sellers pulled orders, and the market gave back a significant amount of gain. If you see a similar trend be on the alert for a bear trap.