Never short a stock very close to an important support level. Let me explain. 88 is a very important support level for GS. Tuesday the stock leaked below 88. But it could not hold below 88. Later the stock rallied strongly. A few on our desk shorted GS when 88.30 held the offer. This is a fundamentally poor trade. Let’s discuss.

First we need to discuss some characteristics of GS. 1) GS often bounces 2-5 points off of support levels. We saw this at 115, 105, 100, 97, 92, 88. 2) GS can trade just below support and then reverse intraday. We have seen this multiple times in the past few months. So shorting just above support offers significant risk.

Why are you short below 88? You are shorting to catch a breakdown in GS. With most breakdowns you will see bids hit aggressively, offers holding, and explosive downmoves. Tuesday when GS leaked below 88 we did not see any of the above. In fact we saw characteristics of what I call the Specialist Squeeze Program. This is where the Specialist lets some short below the support and then squeezes the stock until the shorthand shorts cover. If the reason for why you are short is not present then you cannot be short.

Our 88 support level trumps an intraday hold on the offer. What is your loss if you short at 88.28? Most would answer 10c to 15c. But your real loss is not being long the significant upmove. If you short near 88.30 then your mindset is to short and look for a breakdown. You are not focused on 88.30 lifting and GS trading significantly higher. And missing this upmove is an important opportunity cost lost.

Some on our desk offered that shorting new lows in GS is not a profitable strategy. So they waited for GS to make an upmove to short. Fine. They cited the last downmove in GS when it traded below 92. They shorted into the upmoves and made chops. The difference with their short this time is that GS was not below the support as it was when they were shorting GS below 92. GS was above 88 this time. It was above support. Shorting into the upmove is a good technique just as long as the stock is still below support.

It is much easier to trade the trend when you first begin. Heck it is much more profitable to trade in the direction of the stock even after you are a veteran of 11 years like myself. Most importantly all trades that you make must be fundamentally sound. And shorting a stock just above a support level is not a good technique. If you make 1000 trades using this technique you will lose money.

If an offer holds below 88 in GS then get short. If an offer holds, holds lower, then aggressively get short. If the stock trades down to 87.30, and then trades near 88 and slows, then get short. The stock is still below support. But if the stock is above the resistance level you must get flat, gather information and reevaluate. Don’t make fundamentally poor trades.