The “Strong Short” Trading Signal: When bears break under cyclical support and switch into a down trending mode
Previously in lesson 3 we reviewed several real-life cases when bulls managed to push price over a cyclical resistance. In case of a sustained breakout a following rally accelerates. When a down cycle finally starts all bears can do is to produce a shallow pullback well over the broken resistance. That kind of a weak pullback making a higher low creates an attractive long setup.
In this lesson we will study cases when bears manage to break under support and move down accelerates. We can see that a shallow pullback that follows such a plunge creates a winning short setup.
Let’s first review a bullish sequence of a trending move up.
We can see that at the beginning price respected cyclical support and resistance. In point 1 price turned down off the cyclical resistance. In point 2 price respected a new cyclical support and turned back up. Then price kept climbing up in a new up cycle until a new cyclical resistance got printed in the middle of November 2020. But this time bulls did not give up but kept pushing higher making price to take out the red cyclical resistance. That was a breakout followed by a trending move up. As you can see, a sustained breakout is followed by an extended bull run. In that case bulls pushed ARKK from $101 to $136 in five weeks.
Any rally at some point comes to a point where no more bulls willing to buy stock at a new elevated price are left. At the end of December bulls got exhausted and a new down cycle started.
After bulls manage to break over resistance the most important question becomes how deep will be the following downcycle. You can see that bulls managed to stop the down cycle at the beginning of January 2021 (point 4). That down cycle made a much higher low than the low made by the previous down cycle (see the point 2). A pullback that (i) follows an accelerated part of a rally and (ii) makes a higher low is an attractive long setup. The strength of the underlying bullish trend makes this pattern a high probability winning trading setup.
Now let’s focus on what happened to $ARKK in the first quarter of 2020. In early February 2020 bulls did not have any problem to stop a down cycle right at a cyclical support making another higher low (the red point 1). That was a good signal that the price was still in an uptrend (uptrend is a sequence up and down swings that keep making higher highs and higher lows).
Now look what happened on 22 February 2020 (the point 2). On that day bears managed to push price under a new cyclical support for the first time since November 2019. That was a breakdown that was followed by an accelerated part of decline. Bear quickly pushed price from $143 to $110 in just two weeks.
But any strong move down finally comes to a point when no sellers willing to sell at lower prices are left. This is when a corrective move up starts. By mid March 2020 bulls pushed price back up to $130. Please note that bears managed to stop that corrective bounce well under the broken support (the point 2). That was a sign of a strong underlying bearish momentum. As you can see, the MONKEY Trader Indicator identified the top of an up cycle and start of a down cycle and generated “Strong Short” signal (the point 4).
In the following 10 days price plunged by 12.5%. That short signal played out really well! On 26 March 2020 the indicator detected completion of the down cycle and start of a new up cycle. This is when it printed a green label “Cover Short” (the point 5).
Please note that the indicator also draws thick green vertical lines at exit points for shorts initiated at that specific “Strong Short” signals. I can call that “Strong Short” signal my favorite one because it is probably the most reliable signal produced by that indicator.
Let’s look at several short setups produces by that signal in 2021:
As you can see on the 5 min chart of TSLA shown above, the indicator can find that short setup on any timeframe including short term 5 min timeframe.
To increase number of attractive short setup you could activate another high probability winning short setup “Short PB”:
You can activate that additional short setup “Short PB” in the settings:
In the next lesson we will review several cases showing that even a great setup may fail.
