The bearish sidebyside black lines pattern

The first of the bearish three-stick trending patterns is the bearish side-by-side black lines. It's just plain ugly if you're a bull or an owner of the security with price action that produces the pattern on a chart. The pattern is extremely bearish, and if you see it as you're looking through your charts, you can feel pretty confident that the prevailing downtrend will keep on diving.

Identifying the bearish side-by-side black lines

The bearish side-by-side black lines pattern has a distinctive appearance, and you can see it firsthand in Figure 10-19.

The days play out like this:

l The first day is a down day that comes on the heels of a downtrend.

I The second day has a gap down and also trades bearishly. Note that the gap between the high of the second day and the low of the first day isn't filled.

I On the third and final day, the bears have their way again and, like the second day, there's a lasting gap. The bears are definitely in charge.

Figure 10-19:

The bearish side-by-side black lines pattern.

Using the bearish side-by-side black lines pattern

You can harness the bearish power of the bearish side-by-side black lines to give yourself confidence that a downtrend will continue. For an example, see Figure 10-20, which includes a chart of one of my favorite companies. I'm a red-blooded American, and I love my Direct TV (DTV). Even though I love the company's products and service, if the right pattern shows up, I'm more than happy to short the stock and cheer for it to drop. Seems a little odd to be watching financial television stations on Direct TV and using the information to profit when the company's stock heads south, but such is the ironic life of the trader.

It's also worth noting that because of the competitive nature of its industry, [foil DTV has been a great stock to trade for years.

As you can see in Figure 10-20, the stock is already in the early stages of a downtrend when the bearish side-by-side black lines start to develop. The first and second days are down, and there's a substantial gap between them. The third day is also a bearish day, and so the pattern is complete, and the downtrend continuation is verified.

Figure 10-20:

The bearish side-by-side black lines pattern successfully confirms a downtrend on a chart of DTV.

Figure 10-20:

The bearish side-by-side black lines pattern successfully confirms a downtrend on a chart of DTV.

Failing to confirm a downtrend

Although normally there's some rebounding shortly after the appearance of a trending pattern like the side-by-side black lines, that's not the case with the pattern in Figure 10-21. You can spot a little bit of bullishness a few days after the pattern shows up, but there's no real move into the gap.

You may ask yourself if an ultra bearish pattern like the bearish side-by-side black lines can ever fail. The answer is a resounding yes. For an illustration, consider Figure 10-21, which features a chart of CenturyTel (CTL), a provider of telecommunication services in 25 states. Telecommunication companies have to deal with constant change and competition, and their stocks are very volatile and, therefore, great for trading.

The chart in Figure 10-21 is a fun one because two instances of the bearish side-by-side black lines pattern show up. One appears early in a downtrend, and the other one pops up a little later. The gaps are small on both patterns, so not a lot of distance is covered. And each pattern is followed by some buying, which gives patient traders a better entry level for a short than they would've found at the completion of the pattern. The entry opportunity is fine, but the pattern turns out to be a dud. Both patterns fail at the same time, and I indicate exactly where and when that failure occurs. The bearish side-by-side black lines pattern is rare, and when it appears, it's almost always legit, so don't expect to see too many examples similar to this one.

Figure 10-21:

The bearish side-by-side black lines pattern fizzles out on a chart of CTL.

Figure 10-21:

The bearish side-by-side black lines pattern fizzles out on a chart of CTL.

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