Stock Option Class

EWRC: Bearish, Week, Reversal, Confirmed

Bearish Stock Trade

Focus on stocks that have run up more than 10% in the last few months, but still have a two to three year down trend.
Look for recent relative weakness to the market.
The potential down reversal should be forming below the two-year trend lines and ideally below the 200 day moving average.
The rally should be the result of sector rotation or a rally in the overall market. Avoid stocks that are relatively strong within their sector and have recently released material positive news.
Sell-offs should be accompanied by volume increases.
Look for signs of weakness by using technical indicators like RSI and Money-flow.

Look for fairly steep spikes within a two-year down trend. The spike will provide the stock with plenty of “leg room” to move lower over the course of a week or two.
This trade may take days to unfold. Try to scale in and average your entry cost.
Give the trade some breathing room and don’t place protective stops too close. Longer-term resistance levels can be used for protective stops.
The profit/loss percentage per trade will be larger than it is for Day trades. You don’t want to get “shaken-out” of a sustained move so you must be willing to give the trade more latitude.
If overall market conditions are improving, consider reducing the position.
If the move has not materialized in a week, exit the position and keep the stock on a watch list for future consideration.

A bearish reversal can only occur if the stock has rallied. Be prepared to trade against a recent up trend.
These stocks have reached a critical juncture. They may be in the beginning stages of establishing an up trend, or they may be consolidating and preparing for the next leg lower. Focus on weak stocks in weak sectors. Get intimate with the stock and determine which “camp it is in”.
The overall market should be weak to bearish. 75% of all stocks follow the market. These positions are carried for longer periods of time so they will perform best when the macro environment is supportive.
Move the protective stops lower as the stock moves down and take partial profits at prior support levels.

These stocks have formed a pattern and have moved through an important price level today. The reversal appears to be legitimate.
This is a longer-term trade so don’t be afraid to “scale-in” and average your cost over a few days. A small initial position will allow you to gauge the stock’s weakness without taking as much risk. If the stock performs, consider adding to the position.
If the stock has “confirmed” on a big down gap, wait for a rally to the middle of the gap’s range before establishing the first leg of the scale-in. This trade will last a week or two so there will be other opportunities to get in. If not, there will be many other trades.
Be patient.