Do You Have A Short Watchlist For This Bearish Trend?


Simpler Trading Team

May 02nd 2022  .  9 min read

In a bearish market that lacks structure, traders at Simpler Trading are looking for the market to bounce and open up plays to the short side.

A short watchlist is critical in a market that has the potential to provide overall bearish trends in chop that never seems to end. Without a doubt, market sentiment is unhappy about the downtrend. Market leading tickers of last year are no longer in seemingly easy-to-trade uptrends.

And, classic “buy-the-dip” opportunities are few and far between.

Traders need to look in new places for opportunities. What worked last year is no longer a strong option. Too often, traders are looking in the wrong places and in the wrong direction.

Traders need to become better acquainted with trading this market on the downside – shorting the market – using a short watchlist.

Market overview sets tone for short watchlist

The complexities of this market make it easy for traders to lose heart in an environment that has become more difficult to assess and trade.

The narrative of the news headlines is overall negative. When scanning the headlines, it becomes apparent that this market is not as viable as an investor’s market of yesteryear.

This is a trader’s market.

The difference is that traders need to know where and how to find stocks that are setting up for shorting the market, i.e. short plays.

Understanding the broader market and sectors that are feeling the most impact gives both swing and day traders a better insight into the movement of the market.

U.S. stocks opened this week even lower, setting up a troublesome May. This followed a dismal April performance for all three major indexes – one of the worst since the depths of the pandemic in 2020.

The S&P 500 sank by 8.8% in April in its worst month since March 2020.

As technology stocks were battered, the Nasdaq slid 13% last month – experiencing its worst month since October 2008. All this while U.S. crude oil prices fell, yet maintained an average above $101 per barrel.

Despite the weak opening and gap down through the middle of the session on Monday, the S&P 500, Dow, and Nasdaq rallied to close higher.

The Dow rebounded to close at 33,061.50 points to gain .26% (adding 84.29 points on the day). The Nasdaq popped back to 12,538.71 points for a 1.65% rally while the S&P 500 finished up .58% to 4,155.82 points.

The early rally faces obstacles this week.

The next Federal Reserve monetary policy-setting meeting will be closely watched. The central bank will release its latest policy statement on Wednesday afternoon. Market participants expect the Fed will raise interest rates by 50 basis points.

Fed announcements and expectations of further rate hikes have brought continued stress to market participants and furthered volatility to the broader market.

Expand horizons to find opportunities

Using an outdoorsy analogy, retail traders would do well to “follow the school of fish before baiting the hook.”

Traders need to know the direction of money flow in the market. Simpler traders have limited interest in trading long, or upward moving stocks, for quite some time – until the market proves otherwise.

This means following market trends (that school of fish) is important. The market trends and key levels are the focus of Simpler’s traders – rather than hot stocks of the day.

Remember not to fall in love with a stock. Instead, fall in love with a solid trading setup. These are key to successful trades in this chop, not the stock names. Traders should have no biases and no favorites.

This brings us back to having a short watchlist that can help traders forget about past “hot” performing tickers and focus on the market at hand.

This bearish market practically encompasses the entire market. Traders need to look for stocks that are setting up for shorting the market possibilities – or trade setups that benefit from downward moving stock prices.

Play the trend, not the stock

The market is changing and that brings more opportunities to find setups that retail traders often miss. The short side of the trade has been working in this market.

In a one-two step, Simpler’s traders look to find the setups and then the stocks that fit the criteria. Remember, find the school of fish (short setups) and then bait the hook (stocks moving lower). This process alone enables traders to better control emotions. As traders find themselves in the middle of an open trade, the setup criteria and the trading rules establish the play.

Traders need to watch the buy and sell signals of stocks on the short watch list to make progress in this market. Following the rules of the setup identifies whether to stay in a trade or get out.

The predominant leading stocks – think technology and entertainment streaming services –  are no longer in an uptrend. Often traders are resistant to searching new places for opportunities. This “loyalty” makes trading more difficult because what was working in these leading stocks for almost two years is not working today.

This sets up a central problem in this market – traders are looking in the wrong places, and most often in the wrong direction.

When traders focus on their style of trading and the best setups for pre-established criteria (like short watchlists), they will become more successful than if they try to play everything the market has to offer.

Look to major indices as leaders

The S&P 500, Nasdaq (QQQ), and Dow (along with many key sectors) are lacking any kind of bullish trend, structure, or momentum properties. These indexes are referred to as the “big three” and are the key features that tell traders what the overall market is doing.

This lack of bullish trend or structure is showing up in the same spots over the last several years. The S&P 500, with negatively stacked exponential moving average (EMA) signals, is leaning into the bearish watchlist. In terms of a swing trade, traders would do well to be cautious about the S&P 500 getting aggressively long.

The game plan with Simpler’s traders is planning to short the bounces in the S&P 500. The real question for buy-the-dip traders to consider is whether they are buying this dip into the strongest structure and in the best momentum possible.

The Nasdaq also reveals negatively stacked EMA and sell signals. Swing traders who are looking to trade this to the upside may not be paying attention to the right things. It can be easy to get sucked into a chart that looks to have hit bottom – or even appear to be bullish.

The current overall structure of the Nasdaq is bearish. Simpler’s traders are looking to short the bounces in this index.

The Technology Select Sector SPDR Fund (XLK), along with semiconductors, also gives off sell signals on the bearish watchlist. Both are in a bearish trend and have bearish structure.

We can’t stress this enough right now – the overall market structure is bearish. That means traders are going to likely see a lot less bullish opportunities like the ones seen recently in the energy sector.

The job of traders is to make sure they fully maximize trends and setups as they come available and quickly move away from setups when they break down.

Watchlists for bearish shorts

Setups for short plays are the focus for Simpler’s traders and these setups can occur with some frequency in this market. These setups are meeting their targets quickly, so traders must be prepared as these opportunities move fast and are short-lived.

Traders need to break away from trades that worked in previous market environments. Remember, Big Tech stocks were in play last year, but not so much today.

This market is different and traders are wise to consider short plays.

Traders who hang on to trading setups with only their favorite stocks could sit around for months, waiting for the upside squeeze setup before they realize there are a lot of short plays working in the market.

Traders should remain open-minded to stepping outside of favorites stocks and setups.

There are opportunities in this market if traders know where to look and if they have the open mindset to look in new areas. No love should be lost on “favorite” stocks.

Traders are finding opportunities in stocks they have never traded. Traders now are following these potential plays because that’s where the good structure is being revealed by the market.

Short setups could show up in trading scans but be ignored because they lack appeal or they are unfamiliar. Traders should remember that if a stock has potential for a short play then it is fair game. Traders should be willing to trade just about anything if it fits the right criteria.

Right now, traders are at a point where they can trade a variety of possibilities showing up on the bearish watchlist.

Opportunities to explore, setups to consider

Despite the gloom and doom news, this market is revealing ample opportunity for traders putting in the work.

Once traders have a watchlist in place with both sides covered (focusing on the short side now), they can find the schools of fish. When traders know where to fish, almost everything else takes care of itself.

Regardless of any news narrative, there are setups in the market that may be familiar to traders. The key is looking in different locations to find these opportunities.

Focus on keeping an updated watchlist at all times, target setups on this list, and let the market set up the plays.

Daily habits to find setups can reap rewards

Traders at Simpler Trading make it a practice to prepare nightly for “full-steam-ahead” when the market opens.

Our team scrolls through actionable alerts, runs scans, and completes chart work and sector analysis. This begins with traders looking to play the trend that’s being presented and finding setups that fit current market conditions.

Taking the best of the buy or sell signals and adding them to the watchlist becomes a simple process that allows traders to quickly find the short areas on the bearish watchlist.

This premarket routine makes preparing for trades easier and opens up new opportunities.