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Market history reveals the right time to watch for short candidates, Joshua Hayes says in today’s interview with MoneyShow.com’s Kate Stalter. However, he recommends that newer investors use caution and master the long trade before shorting. Hayes also discusses some strong names from the gold and silver sector.

Kate Stalter: We are speaking today with Joshua Hayes of Big Wave Trading, and he happens to be talking to us today from his office in Maui, so I’m sure a lot of people are going to be envious of that. I should mention that Josh also is a long-time columnist at SeekingAlpha, so great to be speaking with you today.

Joshua Hayes: Thank you Kate. It’s great to be speaking with you today.

Kate Stalter: Give us your take on what has been going on in this crazy market, and what you believe individual investors should be doing at this juncture.

Joshua Hayes: Okay. Well, first off, in 2011, my portfolios topped out around January, and they churned heavily from January to July. During this time, I had a tough time figuring out: Did we want to break out to the upside, or break down to the lower side?

Everything chart wise, because of the heavy distribution throughout the early part of 2011 and the way the past leading stocks from the 2009 rally were acting, was going to tell me we were going to break down.

But QE funny money kept us going higher...but finally in July we got the big crack on heavy volume in the Nasdaq, and finally then broke down below the 50- and 200-day moving average and completely rolled over.

While that was happening throughout July, high-quality short set ups were setting up and breaking down, and the distribution makes it look like the downtrend is going to last longer than people hope for. Sentiment is so very bullish out there. Investors Intelligence Survey has 46% bull to 23% bears, and it just looks like it is going to be lasting for a while.

My suggestion for individual investors is to not buy stocks here. We have to wait until the big-volume down days end and we start getting some upside progress on heavy accumulation. Right now it is just not safe for individual investors, and I do believe cash is where they should be.

Kate Stalter: One of the things that I know you’ve done in the past is to short stocks. Is that something you think individual investors should be doing or staying away from? Give us your take on that.

Joshua Hayes: If you are a new investor, I always recommend that you do not try to make money on the short side. It is much more difficult than the long side.

However, once you have some time and experience under your belt, you can make money going long stocks, you have more confidence, and know your chart patterns and history better. These historical patterns have been setting up for 130 years; nothing has changed.

The optimal time to short, though, is when the market is breaking down. We clearly have that, and you have got to have a previous big uptrend.

Most of the stocks that I go short whenever they do set up, which a lot of them have not yet, like Netflix (NFLX), Baidu (BIDU), Google (GOOG), Apple (AAPL), and Amazon (AMZN) are what I am looking to short because they have had very large gains from the 2009 bottom.

Some stock I am currently short now are Salesforce.com (CRM), Priceline (PCLN), and then Liberty Media (LCAPA). They all have given me the signals to go short.

It is a very, very difficult game, but whenever you have had a very long uptrend, you have all the technical signals that we are going to enter a significant downtrend. It’s not too difficult for me, but as I’m going to say, I’ve been doing this for 16 years, so I have seen some tops.

I got the 2000 top pretty much nailed, just basically on technical action. It was nothing I did; it’s what the market did. In 2007, I was writing for realmoney.com back then, and during late 2007 I posted chart after chart after chart of the leading stocks, showing that we’re going to probably have a significant correction...and, of course, as we know, 2008 happened.

It’s nothing I do; it’s what the market has been doing for 130 years. But, shorting is very difficult, and I definitely recommend you have some experience under your belt on the long side first.