Short Trader: Playing Defense

Editor's note: Formerly, Chris Schumacher's short trading ideas were available only to subscribers to TheStreet.com's Short Advisor. Now these picks are being offered to RealMoney.com and TheStreet.com readers.

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The plunge over the past week has shifted the markets away from orderly technical setups. Any time a major broad movement takes place, it typically either unwinds speculation in markets of strength or unwinds fear in markets of weakness.

When emotions run high, technical analysis of stocks offers very few clues for investors. Support and resistance levels simply do not hold as well as when the markets are reasonably stable.

In my screen of more than 250 stock charts Sunday evening for good picks, I was mainly looking for stocks that were in weak sectors and also did not participate in the market rally from July 2006 to February 2007.

Generally, when the relative strength of a stock is weaker than the broader indices or its sector, the stock tends to be one that speculators hammer first, trying to weed out weak-handed buyers. Many times institutional money will take profits from stocks that have met profit targets and lean on those that aren't doing as well in the same sector.

What I found in my screen was that out of these 250 stocks, those that were ripe for short setups had already triggered, meaning the best entries were no longer available. Not surprisingly, the Dow's 550-point drop negated many of the trade setups of those viable short candidates.

Stocks that are weak in an up market are usually the best short candidates. The other option for uncovering short trades is to look for stocks that have made a euphoric move -- a large spike higher -- within the past week.