Short Trader: Choosing a Wise Entry

This market has been amazingly strong, with the bulls pouncing on any type of weakness and driving prices higher.

During times of such pervasive market strength, the bears really take it on the chin.

In this type of environment, short entries are very critical because you want to minimize your risk relative to the potential reward.

In order to do that, you've got to short as close to resistance as possible so that an adverse move will prompt you to close your position with a minimal loss.

One method that works well is establishing two alternative short entries, depending on what the stock does.

First, you could short on any advance to a key resistance level. Then you could close out that position if the stock broke above resistance.

The second type of entry would be on a breakdown below support. Your buy-stop could then be established just above support.

If the bulls push the stock back above broken support, the breakdown was really a false move and the position should be closed.

Let's see this in action with Akamai Technologies (AKAM Quote).

The weekly chart below shows Akamai shares slowly rolling over after peaking in February. In March, the stock bounced off the 40-week moving average before printing a lower high.

Recently, the stock has fallen below the March low, and is now well below the 40-week moving average with shares recently trading at $44.60.

Akamai Technologies (AKAM) -- Weekly