Rule number one is to short sell stocks only during what you believe is a developing bear stock market, not a bull market. Bear stock markets occur about once every three years, and when they do, the decline occurs at a much faster pace than the previous rise. In a bear market there are only two things you can do: either sell most or all your stocks and get out, keeping your money in cash equivalent like U.S. Treasury Bills or money market funds, or short sell stocks.

It is the best to time your short selling with the action and movement of the general stock market averages. After they showed definite signs of weakness, only then does it become a question of the selection and timing of the individual stocks to sell short. 

Top formations in the general stock market indexes will occur in one of two ways. The first way is for the market averages to move up and make a short-term, new high in price on mediocre or low volume. This tells you that demand for stocks is poor at that point and that the rally will soon be overcome by selling. The second way also involves topping while the averages are still in an uptrend. What happens is that there will suddenly be one, two or three days where the daily volume on the NYSE or NASDAQ increased from the prior day, but the market averages actually make very little to no price progress or even close down in price versus the prior day's close. When three, four or five of these distribution days begin to show up in two to 4 week period, it's time to start raising cash and re-evaluating your current stock holdings.