Okay, so according to the DWA website, many sectors in the red zone reversed to a column of O's today. Although we still have the football, we are in the red zone and it looks like we will be going back on defense soon. The sectors that are in the red (high) zone and in O's are:

-Machinery and Tools
-Retail
-Transportation (non-air)
-Auto and Parts
-Restaurants

However, even though they are in the red zone, all of these Sectors are still "Favored". Do we wait to see them go to "Unfavored" before we look at shorting or should we start looking at charts now to see what we can ride down? DWA subscribers specifically, when do you look at shorting? Or do you not short at all and simply sell covered calls and tighten up stops? I like the idea of buying on the way up and shorting on the way down, though I don't have much experience with it.

Dorsey and Wright!

http://www.dorseywright.com/

Some quick comments on selling stock short, because I’m in a hurry and I’m going to get yelled at if I don’t cut this short.

Selling stock short is not the mere inverse of going long and if I’ve made it sound like it is, I apologize…..it comes from years of trading commodity futures, where going long or short is essentially the mirror of each other.

The short stock sale requires an account that permits it (non-retirement account), as well as a broker that permits it. Typically, you will have to “persuade” a broker (by filling out forms) that you have the experience (and money) necessary to handle short selling. It requires a “margin” account, which means that in essence you are borrowing stock from your broker to do the trade. Although not strictly a liquidity issue, it requires your broker having shares available to “borrow”. Check with your broker to find out exactly how this works.

Either way, when you “borrow” something (stock in this case) you have to pay interest on the loan. This is no different. So the longer you are in the trade, the more it costs you. If the trade goes against you, you need to have the discipline to cut losses short because a short stock position is NOT an investment. It is definitely not a trade that you can “buy and hold”, hoping that it will come back to “even” if it goes under water.

Personally, I like put options for a number of reasons, but that’s another story and has its own set of risks. Another way to do it is by “collaring” stocks that you own and want to continue to hold. (Search this forum using "collar" for details. This technique alone, used correctly can make you a lot of money and completely change the way you look at markets.)

As for the specific questions about the DW&A sector models, I don’t think that is is envisioned that you should wait until a sector becomes “unfavored” to take short positions. In fact, I don’t recall seeing anything at DW&A that implies the advocacy of short selling in a vacuum. (Check with f5 to confirm.) The sectors typically take time to change from “favored” to “average” to “unfavored”. You can check this out yourself, but if you do wait for a sector to move from favored to unfavored your ship will have likely sailed away.

I’m looking at buying puts in the “favored” sectors highlighted above (I’m already in selected put options in the banking sector). The big advantage (and disadvantage) with options is “time”. While they buy you time (interest free), they lose value as time disappears (which reminds me….I’ve gotta go).

“Or do you not short at all and simply sell covered calls and tighten up stops? “

Question: what do you do when you do this and your tightened stop gets hit (which is quite likely)? Now, in effect you’re “short” (a trade that requires margin) by holding naked calls………….