The bearish thrusting lines

The first two-day pattern that indicates the continuation of a downtrend is the bearish thrusting lines pattern. I like this pattern because the signal day is an up day. You may scratch your head and wonder why I would like an up day that indicates the continuation of a downtrend. At first blush it does sound counterintuitive, but the presence of an up day on the signal day of this pattern means that a great opportunity exists to put on a short at prices higher than the previous day of the downtrend.

Understanding how to spot the bearish thrusting lines

Figure 8-22 shows you exactly what the bearish thrusting lines look like on a chart. Again, the prevailing trend should be down, and the setup day is a long black candle. On the signal day, prices open weak, but then the bulls come in and try to reverse the trend and take over. They seem to be succeeding, but they're not quite strong enough to get prices to the upper half of the candlestick that was created by the setup day's trading. This activity means that although the bears don't completely control the day, they're still around and are eager to reassert themselves in the coming days.

Figure 8-22:

The bearish thrusting lines pattern.

Trading on the bearish thrusting lines

For an example of the bearish thrusting lines working well, turn to Figure 8-23 and a chart of the stock for the Toll Brothers (symbol TOL), which is a highend home-building company. During the recent contraction of real estate prices, the publicly traded home-building stocks lost a lot of ground, and TOL was no exception.

The bearish thrusting lines actually pop up three times on this chart, and for each of those three occurrences, the stock's price drops for days after the pattern appears. For the sake of emphasis, I added a downtrend line to show the continuing downtrend.

Figure 8-23:

The bearish thrusting lines pattern works on a chart of TOL.

Figure 8-23:

The bearish thrusting lines pattern works on a chart of TOL.

iBEfr A successful trade based on the bearish thrusting lines in this chart starts with the close of the first pattern's signal day. If you're short from the top of this downtrend, you definitely feel like a skilled trader. You can easily monitor the continuation patterns and follow the trend as it heads down. But where would you exit the short?

An exit would be prudent when the price trades over the hand-drawn line on the chart. (See Chapter 11 for more information on how to draw trendlines.) At that point the downtrend has been broken, and the easy money on the short has been made, so be smart and take your tidy profit and move on.

Recognizing a disappointing bearish thrusting line pattern

Want to see what happens when the bearish thrusting lines fail? Look no farther than Figure 8-24, which is a chart of the futures contracts that trade based on the level of the Japanese Yen versus the U.S. dollar. You can see that toward the end of this downtrend, two double-stick patterns actually fail to indicate the end of the downtrend. Both two-day patterns and the failing days are highlighted on the chart.

I hate to see the patterns in Figure 8-24 fail. They both start out with so much promise! Both patterns appear in downtrends and meet the criteria of having a long black candle setup day followed by an up signal day that retraces some of the long black candle day's area but doesn't close higher than its midpoint. The failures occur when the highs of the signal days are violated on the days that follow each pattern. You can even say that the violations occur when days that follow the patterns have prices that exceed the midpoint, open, or high of the setup day. It doesn't matter which level you choose — they all get violated, the patterns fail, and the trends turn upward quickly.

Figure 8-24:

The bearish thrusting lines fail at the end of a downtrend on the Yen futures.

Figure 8-24:

The bearish thrusting lines fail at the end of a downtrend on the Yen futures.

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