Like I've said, I base my shorting strategy on William O'Neil's book. In it, he and Gil Morales give a checklist of technical action that one should look for when shorting stocks. They provide a few examples and I've reproduced one of them here. It is Cisco Systems just before the bubble burst.
- Look for a head and shoulders top. A gap island top is a bonus
- Don't short at the "obvious" point. You'll get stopped out
- Look for rallies on weaker volume, or wedging
- Wait for 3 or 4 rallies above the 50 dma. This is probably the hardest call. I think the best bet is to short after the second rally and if you get stopped out, just try again after the next price break.
- Don't make the obvious short sale when price breaks the neckline.
- Wait 5 to 7 months after the absolute top before shorting.
- Don't short stocks with small floats. The more stocks splits the better!
- Most importantly, make sure the market is in a downtrend.