Bearish Trend Tactics for the Small Trader

Generally speaking, this tactics should be applied in a bearish or sideways market.  There should be a consistent deterioring in the market indicators such as the Dow Jones, S&P-500 and NASDAQ indexes. The recipe is as follows:

	Get a pool of candidates to be analyzed, based on fundamental data.  The market value is still important here, to be sure to trade liquid securities, so look for companies having a market value > 1 Billion. Then look for trouble or suspicious companies.  Revenues and Earnings should look oscillating or decreasing in the last 2-3 years, Current Assets decreasing in percentage terms, Long Term Debt increasing, and Debt Service greater than 30% of the Gross Profit, and growing.  Look for well established companies facing fundamental business problems. These are general basic ideas, you may add more to filter.   Renew this list monthly or quarterly.
	Before continue, check your actual possibilities to taking advantage of the down trend for this particular stock.  This is important to not waste your time with the analysis that follows in the next parragraphs. Verify if the stock is not in the hard-to-borrow list from the market authorities and that your broker has supply of this stock for shorting.  If the stock cannot be shorted directly, you still can take advantage of it by buying puts.  Check if the stock has available put options with adequate liquidity, a cheap price (remember this means low IV, not a reduced cost in money), and the remaining features recommended in  Options: the quickest way to win.  Even is the stock can be sell short, you may want to play put options, as the uptick rule may difficult your entry when shorting directly the stock.
	Review the technical charts of these candidats. Look for prices reaching a peak in the last 2-3 months, and then with abrupt change in the tendency, preferible with not high volume.  The best is to look for companies that recently climbed up with a recent 52-high, but with low volume.
	Look for prices going lower (lower highs and lower lows) for at least 2 or 3 days, after the turning point described above.  The perfect entry is when the last day analyzed has a modest decrease in price with strong volume, above the average.  If this is the case, be prepared to jump in the next day.
	Double check again the fundamentals, and review the latest news of stock or the industry.  Again, don't overdimension them.  In this case, the absence of news is normally good.  If there are bad news out there, probably is too late.  "Good news" such as CEO removal, a recent deal that may be key for the company's future, a programmed acquisition, etc. are not good. "Noise good news" such as too-enthusiastic launching of mediocre products are good signs for a bearish point of view.
	Plan your stop loss.  Calculate the ATR, which will define your estimation of the noise of the market for that stock. Assume for the moment that your enrty price will be the close level plus half ATR. Identify the support and resistence levels, based on previous minimums and highs.  Set your stop loss on the entry price plus two ATRs.  Check it in the chart to see if it is below the resistance line (if so be cautious, this is risky).  The best picture is a stop loss above the support line, and the support line below the entry price + 2 ATR.
	Estimate your loss if the stop loss is hit. If it is greater than 10% of your total capital, it is too risky, don't jump in.  Have in mind that as you grow, this limit should be reduced to 2%.  You may adjust the number of stocks to buy to keep you maximum loss acceptable.
	Plan your entry.  As mentioned, you should expect to enter with a price equal to the previous close plus half ATR. This is the ideal and safest situation. Start by setting a sell limit with that price.  The next day, it could happen that the price gap down, meaning that will open with a price lower than the close.  The recommendation in that case would be to watch the price and if it doesn't goes up for 1-2 hours, but goes sideways or increases, consider jumping in at a price no greater than the open price plus half ATR, or a full additional ATR if you see a lot of volume buying (it could be the start of a big crash in price for the day, and you want to catch it early.)
	Adjust your stop loss to your entry price or previous close or todays open (whichever is lower) plus 2 ATRs.