Assisted Living's Teetering

When shorting a stock, it's important that the bearish position be a part of some larger scheme. If you are a committed, dyed-in-the-wool bear with a dedicated short fund, then shorting is your only game. You're just a backward buyer, buying only after you've sold.

But there are other scenarios for short-selling. For example:

• Perhaps you are a professional pessimist who has a knack for finding chinks in the armor of an attractive stock.
• Perhaps you have just found a stock that is so extremely overvalued because of an enthusiastic public that you feel the "all in" signal has been given, thereby clearing the way for a reversal.
• But perhaps you're just looking to hedge your existing long portfolio with some short positions that will do well if the market turns. Essentially, you're planning for a rainy day. As such, you've got different expectations for those "rainy days" that occur during sunny periods.

But no matter why you are going short, the important thing is that you know why you are shorting.

I hear from readers every week telling me either about their profitable trades, or sharing their misery about their losing trades. And a trait shared by most of the unhappy traders -- either bulls or bears -- is that they really can't pin down exactly why they took the losing position.

If they are long, their sole rationale for buying was because they thought the stock was going to move higher. Period!

If they are short, their sole rationale for the position was that they thought the stock should be lower. Period!

Those aren't reasons; those are expressions of hope.

Whether you are technically oriented or fundamentally oriented, make sure you've got a rationale for what you are doing and a plan for doing it. Only after you've done that will you be able to know when to alter your plan.

Heeding the Action

With that in mind, let's look at today's short, Assisted Living Concepts (ALC - Cramer's Take - Stockpickr). This is a technical trade, based solely on the price action of the stock.

The daily chart shows that Assisted Living shares have almost doubled from the November low to the April high -- only to roll over and start retracing the advance. However, with the Relative Strength Index (RSI), a momentum indicator, at a new low and the stock starting to walk down the lower Bollinger Band, there just doesn't seem to be a lot of buyers for this stock.

Assisted Living Concepts (ALC) -- Daily