Profit From the Pain

We just finished up the short squeeze of the year. The rally off the October low got its fuel from a huge population of short-sellers throwing in the towel at the same time. To make matters worse, these same folks kept selling each dip, only to get crushed as we charged to higher levels.

One of the best times to sell short is at the end of a squeeze. By this time, the usual suspects have lost so much money that new short-sellers often have the arena to themselves. This can generate perfect conditions for this unique style of market entertainment. We could be entering one of those periods right now.

A good short-selling environment doesn't change my opinion that we'll find a tradable low in the next few weeks and retest the highs. But there's a lot of money to be made right now selling weak stocks and taking profitable pieces out of their pain. So get in there and trade, but use a trailing stop, and don't overstay your welcome.

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I've put together a list of my favorite short picks from five market sectors. These stocks are liquid, and most are household names. And they all look like they're headed lower in the coming weeks.

Note the blue line in the volume window. This shows the on-balance volume indicator. This is a great tool for measuring how much buying interest a stock gathers during a rally. All of these stocks show very weak on-balance volume, although they rallied with the broad market. The theory here is that they'll fall farther and faster on this correction than stocks with better sponsorship.

SBC Communications (SBC - commentary - Cramer's Take) rallied 45% off its September low but did little to improve its long-term technical health. The stock reached its 200-day moving average about a week ago, and started to roll over. The on-balance volume on SBC has been pitiful throughout the rally.

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Alan Farley is a professional trader and author of The Master Swing Trader. Farley also runs a Web site called HardRightEdge.com, an online resource for trading education, technical analysis and short-term investment strategies. At the time of publication, Farley did not have any positions in any of the stocks mentioned in this article, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Farley appreciates your feedback and invites you to send it to [e-mail].. Also, click here to sign up for Farley's premium subscription product The Daily Swing Trade brought to you exclusively by TheStreet.com.

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