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How to Play a Stock Market Crash

Stocks in this article: SDS QID APOL

Another way to play a potential stock market crash is to short some of the most popular high-priced momentum stocks. The reason that these stocks make such great shorts during a crash is because so much hot hedge fund money is in these names that when they sell, the declines will come "fast and furious."

Keep in mind that the market won't care about the fundamentals of these stocks if a crash comes. Hedge fund managers will only want one thing, and that is to go to cash and to protect their profits in these stocks. Also, I would anticipate the high-frequency traders to come after many of these names with well-placed computer algorithm sell programs.

Some of the names I would consider are Priceline.com (PCLN), Netflix (NFLX), Apple (AAPL), Chipotle Mexican Grill (CMG), Google (GOOG), Goldman Sachs Group (GS), F5 Networks (FFIV), Salesforce.com (CRM), Baidu (BIDU) and Amazon.com (AMZN).

Some other lower-priced momentum names that could see very sharp drops include Akamai Technologies (AKAM), Acme Packet (APKT), Joy Global (JOYG), Bucyrus International (BUCY) and Green Mountain Coffee Roasters (GMCR).

More on Akamai

Again, I think the best way to play the short side is to use put options rather than to short these stocks outright. With put options, you can limit your short exposure, because you'll know exactly how much capital you have at risk. If you think a market crash is on the horizon in the next couple of months, or even sooner, I think the abovementioned names should be on your short radar.

Finally, a more conservative way to avoid a stock market crash is to simply move your stock allocations into cash. Remember, if the crash doesn't happen, you can always buy back into the market at anytime. And if the crash does happen, then you will have a war chest ready to buy back stocks at bargain basement prices.

All of this is not to say I'm calling for or predicting a market crash. I'm simply pointing out some of the technical warning signs -- and some of the ways to play a crash if the price action confirms that a major drop is knocking on the market's door.

To see more market crash plays, including ProShares UltraPro Short Russell 2000 ETF (SRTY) and ProShares UltraPro Short S&P MidCap 400 ETF (SMDD), check out the Top Stock Market Crash Plays portfolio on Stockpickr.

-- Written by Roberto Pedone in Winderemere, Fla.

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At the time of publication, author had no positions in stocks mentioned.

Roberto Pedone, based out of Windermere, Fla., is an independent trader who focuses on stocks, options, futures, commodities and currencies. He is also an outside contributor to Beconequity.com and maintains the website Maddmoney.net, which he sold to Blue Wave Advisors in 2008. Roberto studied International Business at The Milwaukee School of Engineering, and he spent a year overseas studying business in Lubeck, Germany.

Stockpickr is a wholly owned subsidiary of TheStreet.com.
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