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50 DMA Breakdown Watchlist Methodology

The watchlist is compiled by selecting stocks that meet a specific set of criteria. These criteria are based on the guidelines offered in How to Make Money Selling Stocks Short by William O'Neil with Gil Morales, with additional requirements and constraints of our own.

50 DMA Breakdown

The criteria for adding a stock to the 50 DMA Breakdown watchlist are:

50 DMA Breakdown Criteria
Commentary
1. At least 30% of the share float must be held by institutions. There is no minimum share price now.
When institutions unload a stock, they can significantly increase supply which will drive down the price. The best shorting candidates will have a significant percentage of their share float held by institutions.
2. The average daily volume must be at least 500,000
Stocks with greater liquidity are less likely to make sudden moves creating a short squeeze. (NB. O'Neil recommends at least 1 million shares - we go lower to allow some freedom of choice)
3. The stock must have closed at least 100% above the lowest point in its base in the last 36 months.
We want stocks that have made significant gains, and have a deep base to fall into to give a good return on the short sale
4. The technical strength of the stock must be deteriorating relative to the overall market strength
This is important because although the stock price may be falling, it could still be outperforming the overall market. We want to find stocks that are weakening compared to the rest of the market.
5. The stock must be below its peak of the last 6 months and have begun to oscillate around its 50 day moving average. A minimum of two crosses to the downside of the 50 day moving average are required.
Failing stocks tend to use the 50 day moving average as a support/resistance line while under- and over-shooting it.
6. There must have been at least one day of heavy selling (at least 1.5 times average daily volume) since the stock peaked.
This indicates weakness and that the stock may about to become under heavy distribution.
7. The stock must have closed above its 50 day moving average in at least one of the last two sessions.
This requirement ensures that the stock may be about to break below the 50 dma, or may have just done so. An alert will be sent on either of these two days if the projected volume exceeds 1.5 times average daily volume.

8. The stock must have closed within 5% of its 50 day moving average

 

We want to exclude stocks that are too far above the 50 dma or are already too far below it.to be probable shorting candidates.

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