3 Short Sales for Tax Selling Season

Tax selling pressure is likely to pick up into Dec. 31, with thousands of issues trading in the red for 2018. More importantly, many of those stocks peaked at much higher prices, attracting bagholders who need to decide if they want to take short-term capital losses. It isn't as bad for long-term shareholders with positions taken in prior years because major benchmarks are trading above 2016 and 2017 levels, suggesting that many of those positions are still profitable.Two opposing strategies set up at this time of year for the fast-fingered crowd looking to book opportune profits. The first sells short stocks that are likely to face tax selling pressure into year end, while the second buys those stocks or similar candidates at the start of the new year, expecting the January effect to kick in. This price action doesn't always unfold as expected, but the likelihood is higher in 2018 than in the past two years due to the large supply of losers.Finding the top plays for tax selling is easier than you might expect. Pull up a list of S&P 500 stocks you want to trade and sort by percentage distance below the 200-day exponential moving average (EMA). Identify the worst candidates on this list and review their overbought/oversold readings through stochastics or another relative strength oscillator. Candidates at overbought levels often produce the best results because the positioning suggests a healthy supply of losers that haven't sold yet.