The bearish squeeze alert pattern

Like its bullish counterpart from Chapter 9, I'm fond of the bearish squeeze alert. This signal either works or doesn't work quickly, and it appears frequently because the criteria for the pattern are relatively flexible.

Familiarizing yourself with the bearish squeeze alert pattern

The bearish squeeze alert pattern can take on a few different forms, and you can get a feel for one of them by reviewing Figure 10-16. The first day of the pattern has to be a down day, and the longer the better. The second and third days can be up or down, just as long as they're inside days relative to the previous day. That means that both days must have a high that's lower than the previous high and a low that's higher that the previous low. In other words, the body of each candle has to have a range that doesn't exceed the upper or lower ends of the body of the previous day's candlestick.

Figure 10-16:

The bearish squeeze alert pattern.

Using the bearish squeeze alert pattern in your trades

After you've figured out how to spot the various forms that the bearish squeeze alert can take, consider how to use it for trading. To get started, take a look at the chart in Figure 10-17. The chart shows the price action for the stock of the investment bank JP Morgan Chase (JPM). The stock has close ties to the market, and the company has operations in just about every facet of the financial world. JPM is also one of the oldest banks in America, dating back to 1823. That probably seems like a long time, but remember that candlestick charting was around several hundred years before J.P. Morgan hung out his shingle.

Figure 10-17:

The bearish squeeze alert pattern comes through with a useful signal on a chart of JPM.

Figure 10-17:

The bearish squeeze alert pattern comes through with a useful signal on a chart of JPM.

The bearish squeeze alert in this chart occurs at the top of an uptrend that appears to be fading a little. The first day is an up day, but it doesn't quite make a new high for the recent uptrend. The second and third days are both inside days relative to the first day, and the bears would be happy to see that both days are also black candles.

When you see black candles for the second and third days of the bearish squeeze alert pattern, it's a good sign. The bears are controlling the price action and offer additional assurance that the prevailing uptrend is about to roll over.

The bears also appreciate the third day, where the body of the candlestick is low in the range of the day's trading action and near the low of the day. If you spot a similar pattern in a similar environment, get ready to short!

Fatting short with the bearish squeeze alert pattern

Like the successful bearish squeeze alert pattern example in Figure 10-17 (see preceding section), the failure example in Figure 10-18 happens on the chart of an American icon: Coca-Cola (KO). As a steadily growing consumer company, Coca-Cola's shares usually aren't terribly volatile and, therefore, may not be the best trading stocks around.

There's a very solid uptrend in place before the pattern in Figure 10-18 emerges. A long white candle shows up on the first day, followed by two inside days, both of which are black candles. The pattern is completed, but the bears have only one day to feel good about their short position before the pattern is proved invalid. The day after the pattern is a bearish day, and it really does appear that the trend will turn, but then the bulls show up on the second day after the pattern and violate any level that can be considered resistance.

Figure 10-18:

The bearish squeeze alert pattern doesn't work out too well on a chart of KO.

Figure 10-18:

The bearish squeeze alert pattern doesn't work out too well on a chart of KO.

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