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Guest Post by Trader Stewie: Rising Wedges for Shorting
This guest post was adapted from a private, members-only update that Trader Stewie from the Art of Trading shared with his subscribers. This is his perspective on using the “rising wedge” setup to profit from downward moves in price.
For those of you who are new to Trader Stewie, he has been trading for since 1998 and has a well-earned reputation for being a foremost expert technical analyst. In addition to running the Art of Trading, he also writes a blog called The Impatient Trader and is a prolific Twitter user. When Stewie isn’t trading, he can usually be found in the kitchen cooking up something delicious looking!
As many of you have seen lately, I’ve been sharing more and more RISING WEDGE setups in the AOT private twitter.
Rising Wedge patterns are bearish continuation patterns. They are the exact opposite of Falling Wedges(which are bullish patterns)…
I especially like Rising Wedge patterns where the stock starts to bump into resistance areas such as key Moving Averages or Downtrend trendlines which act resistance …
Rising Wedges looks like this:
This pattern works best in stocks that already in a downtrend… So you’re essentially looking for a low quality, meager, low volume bounce(where the stock simply bounces to relief oversold conditions, aka “Dead cat” bounce) before it resumes the previous trend, which is DOWN…
I especially like to use this pattern in tandem with a “BEARISH Power Earnings Gap”: so a stock that gaps down and sells off after reporting poor earnings, the stock then makes a weak multi-day, low volume bounce that bumps and stalls into resistance… then look for the stock to roll over to downside again..
For example, last week on the private Twitter, I shared this DDD short setup …
Notice how DDD gapped down a few days ago and sold off hard all day after reporting poor earnings…
The stock then made a weak multi-day bounce to form a mini Rising Wedge pattern before rolling over with the Nasdaq late last week…
Can see how DDD started to roll over to the downside…
And then started to accelerate to downside…
DDD ended up being down about 6% to 8% on Friday ever since pointing out this setup…
This is the sort of pattern that’s been working in this weakening market lately. GS did a similar Rising Wedge pattern last week as well…
Since this market has been very volatile lately, it’s not a bad idea to reduce size but widens stop losses a bit to allow more room for stocks to wiggle around while they complete trading patterns…
This is my game plan next few days actually, so actively seek more Rising Wedge patterns and enter these trades using 1/2 my normal position but widen the stops a little bit to give stocks more room to work in a market that’s been getting increasingly more volatile lately….
You can enter a short position while the stock is stalling resistance near the Rising Wedge’s triangle apex or once it starts to actually roll over to the downside once you’ve identified a good-looking Rising Wedge pattern.
Stop loss would go right above the Rising Wedge pattern’s highs.
For more from Trader Stewie, please visit the Art of Trading, the Impatient Trader, or his Twitter Feed. Interested in Multi-Timeframe Analysis? Be sure to check out TrendSpider, a software application that, among other things, makes it incredibly easy to compare data from different timeframes. Learn more here.
