A textbook short trading setup that played out by the script
On Wednesday early morning RTY futures completed a topping sequence on 30 min chart. The topping sequence is comprised of three steps:
(1) price breaks over a cyclical resistance and switches into an up-trending mode; and
(2) price produces a pullback that makes a higher low over the broken resistance-turned-support. That pullback making a higher low confirms strength of the underlying bullish momentum and is recognized by the Monkey Cycle Trader indicator as the “Strong” Buy setup and, finally
(3) one more push higher stumbled upon a new cyclical resistance. That new resistance confirmed completion of an up cycle and the topping sequence.
What made this short setup even more attractive is the fact that RTY completed a topping sequence not only on 30 min char but also on 5min chart around 7 AM EST.
That completed topping sequence on two timeframes was only a prerequisite for a short trade. To initiate a short trade, we needed to get a confirmation that a move down has started, a trigger for the short.
That confirmation came in the form of breakdown under the green cyclical support on 5 min timeframe. Any breakdown is a combination of two events:
(1) the breakdown itself when price drops under support, and
(2) retest of the broken support from below. We can consider a move under support a breakdown setup only after bulls try to test the broken support from below but fail to reclaim it.
After bulls’ failure to reclaim the broken support a move down normally accelerates.
Bulls failed to reclaim the broken support at 9–30 AM and RTY plunged hard. It dropped from 2,048 to 2,010 in a matter of two hours.
Now let’s talk about the exit rule for that short trade. What was the right moment to cover the short?
Remember, prerequisite for that short trade was the completed topping sequence on 30 min timeframe. That topping sequence was completed pre-market when a new cyclical resistance was printed. That happened when the Monkey Cycle Trader indicator detected completion of an up cycle. The whole idea behind that short setup was to ride a new upcoming down cycle on 30 min timeframe. Therefore, it's reasonable to keep that short opened until the indicator detects completion of that down cycle and prints a new cyclical support on 30 min chart. That happened at 10–30 AM:
In conclusion: that simple easy to track short setup would let you go short at 2,048.30 (when price dropped under the support on 5 min chart after bulls’ failure to reclaim it) and close the short at 2,026.70 (a closing price of a bar when the cyclical support was printed).
Read about a long trading setup.
Read another case study explaining rules of a short trade.
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