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First Analysis of PLTR: https://auguryinvest.app/editorials/44

The Ultimate Guide to Short Selling

Based on the transcript, I've put together a comprehensive guide to short selling that reflects the approach and philosophy discussed in the video. This guide covers the tools, strategies, and mindset needed for effective short selling.

Understanding Short Selling Fundamentals

Short selling is a strategy where you profit from a stock's price decline. Unlike traditional investing where you "buy low, sell high," short selling reverses the order - you essentially "sell high, buy low." When you short a stock, you're betting that its price will decrease over time.

Key Tools for Short Selling

1. Technical Analysis Tools

Fibonacci Retracement Tool: A crucial instrument for identifying potential reversal levels. The speaker uses this to map out possible price targets on both short and long-term charts.
Trading View: Recommended as a good platform for technical analysis and chart study.
Moving Averages: The 200-day moving average is referenced as a potential target level for longer-term shorts.

2. The "Three-Day Rule"

This is a custom approach mentioned in the transcript for applying Fibonacci tools:

Look for a nice gap up in price
Use the high and low of the past three days for setting Fibonacci levels
For shorter-term trades, use shorter-term Fibonacci highs and lows
For longer-term trades, consider the high and low over a few years

3. Position Sizing Tools

The approach involves:

Kelly criterion to determine optimal position sizing
Using half-Kelly (or less) for more conservative positions
Calculator for determining exact share counts based on portfolio percentage

Entry Strategy for Short Positions

1. Identifying Overextended Stocks

Look for stocks that have:

Made substantial moves (100%+ increases)
Reached extension levels on Fibonacci charts
Possibly traded at unsustainable valuations

2. Price Target Setting

For each short position, establish:

A clear stop-out price (where you'll exit if wrong)
Multiple price targets on the downside with assigned probabilities
Realistic assessment of probability for each outcome

3. Timing Considerations

Avoid shorting stocks at immediate all-time highs
Look for signs of momentum slowing or reversal
Consider "extension levels" where stocks might naturally pull back
For Fibonacci extensions, the speaker notes that "with each break above, you get a larger move"

Risk Management Philosophy

1. Probability-Based Approach

Assign percentage probabilities to different outcomes
Calculate "edge" based on risk-reward probabilities
Only take positions with positive expected value
Small edge (4% Kelly in the example) suggests a small position

2. Stop Loss Discipline

Set clear stop-out prices before entering trades
In the example, the stop was set above the "double extension" level
Accept 50% probability of getting stopped out in some cases

3. Position Sizing

Adjust position size based on calculated edge
Use half-Kelly or less for conservative positioning
In the example, a 2% portfolio allocation was chosen for a trade with limited edge

Portfolio Hedging Strategy

1. Balancing Long and Short Exposure

Use shorts to hedge long positions in related themes
Example: Shorting Palantir to hedge Alibaba position (both AI-related)
Goal is to reduce overall market exposure while maintaining theme exposure

2. Rebalancing Strategy

Take profits on shorts during market pullbacks
Deploy those profits into long positions at better prices
Gradually adjust long/short ratio as market conditions change
Example: Moving from 50/50 to 60/40 or 70/30 long/short as markets get cheaper

3. Sector/Theme Considerations

Understand that perfect hedges are rare
Be aware that stocks may move on multiple themes (AI, China, etc.)
Hedges may provide imperfect but useful portfolio protection

Shorting Philosophy and Warnings

1. "Never Try to Short Themes on Valuation"

This is emphasized strongly in the transcript. The reasoning:

You will "get ran over by the crowd"
Thematic moves can extend far beyond rational valuations
Madness of crowds must be considered
Example given: People shorting quantum stocks on valuation while the theme runs

2. Short Seller Psychology

Many shorts get "bent" (damaged) trying to short too early
Avoid shorting stocks in strong uptrends based purely on valuation
Recognize that "when stocks go, they go" (momentum can be powerful)

3. Ideal Short Candidates

Prefer stocks that are "not trending violently"
Look for technical signs of weakness rather than just high valuations
Consider stocks that have already shown signs of topping out
Be patient in finding good short setups

Practical Implementation Example

Using the Palantir short example from the transcript:

Identify a stock that may be overextended (Palantir at $117.39)
Use Fibonacci extensions to map potential levels
Set a stop-out price ($135)
Establish downside targets with probabilities:
- $105.44 (30% probability)
- $91.76 (15% probability)
- $65.00 (5% probability)
Calculate position size based on edge and portfolio value
Execute the trade with clear exit parameters
Plan to rebalance when first target is hit

Final Thoughts

The approach to short selling shown in the transcript is highly calculated and risk-aware. It emphasizes:

Technical analysis over pure fundamental valuation
Precise position sizing based on probability
Using shorts as tactical hedges rather than pure directional bets
Respecting market momentum and crowd psychology
Being selective about short opportunities

Remember that short selling carries significant risks, including theoretically unlimited losses if a stock continues to rise. The disciplined approach outlined above helps manage these risks while potentially adding value to your overall portfolio strategy.

PLTR Short Breakdown