Short trades and trend confirmation with trendlines and bearish patterns

Selecting the most appropriate time to get into a short trade can be a trying task. Timing is critical, and any decision-making help can be a real blessing. Luckily for you, considering trendlines and bearish-trending candlestick patterns together can provide just that type of help. I show you what I mean in this section with a couple of real-world examples.

A short trade example with a bearish trendline and candlestick pattern

You can find the first example in Figure 15-1, which features a chart of Altera Corp. (ALTR), a maker of semiconductors that go into a variety of electronic and industrial products.

Figure 15-1:

An ALTR chart where a few bearish-trending candlestick patterns and a very long bearish trendline reveal a short trade entry.

Figure 15-1:

An ALTR chart where a few bearish-trending candlestick patterns and a very long bearish trendline reveal a short trade entry.

The downtrend in the chart in Figure 15-1 is about as convincing as you can find. The stock just keeps grinding lower. Short sellers would be pinching themselves with each passing day! The downtrend is so pronounced, in fact, that I run out of room for it on the right side of the chart.

The first bearish pattern that pops up on the chart is the bearish-thrusting line pattern (see Chapter 8 for details), and its bearish prediction should be just what you need to initiate a short position. This pattern's appearance helps to establish a bearish trendline, which just keeps on extending until the chart runs out of room.

The second pattern is another bearish-thrusting line pattern, and it signals that the price will continue to drop. It also makes for a nice second chance for any traders who didn't get on board with a short position after the first pattern, because the downtrend looks to still be in its early stages.

This trend stays in place for a fairly long time, and then a new bearish-trending pattern appears. This time it's a bearish neck line pattern (also described in Chapter 8), which predicts a continuation of the downtrend; at this point, however, the downtrend has been in place for quite a while, and it's probably too long to initiate a new short position. However, if you're already in a short, it's very comforting to see some assurance that even lower prices may be on the horizon in the immediate future. If that's the case, hang on and ride the downtrend just a bit lower to maximize your profit!

Another bearish trendline and bearish pattern leading to a short trade

One more example of how you can combine a bearish trendline and a bearish-trending candlestick pattern is on display in Figure 15-2. This diagram is a chart of Motorola Inc. (MOT). Originally a maker of radios and an innovator in the creation of the car radio, it's now known mostly for its cell phones.

Figure 15-2:

A chart of MOT where a bearish-trending candlestick pattern and a bearish trendline signal a short trade entry point.

Figure 15-2:

A chart of MOT where a bearish-trending candlestick pattern and a bearish trendline signal a short trade entry point.

Candlestick Confirmation Entry

As you can see, a downtrend is in place when the bearish-thrusting line pattern appears not once but twice. (The bearish-thrusting line pattern appears many times in Chapter 8, where I discuss it extensively.) When the first pattern appears, the stock has moved so much in such a short period of time that it's tough to place a trendline based on recent activity. More aggressive traders initiate a short sell after seeing this first pattern, even though a definable downtrend isn't really in place. Then after the appearance of the second pattern, you have a good opportunity to draw a downtrend line by using the high of the rally between the two patterns.

The second pattern presents another possible entry point, and some may think it's more reassuring than the first pattern because of the downtrend line. The trend points down and the pattern pops up, but there's a lot of room between the end of the pattern and the trendline, so the risk level is relatively high. It's a pretty perilous short trade to enter at this point.

0 0

Post a comment