What Makes a Good Short Setup? Reviewing the Bearish Trade!
Updated: Sep 29
2023 has been a strong year for stocks but in the past 8 weeks I've noticed some strong follow through to the downside that has offered more consistency over the long trade in the same period.
I'm not a "perma" bull nor a "perma" bear I try to be unbiased, impartial and unemotional to the trade. I think I described it best here:
Over the past 8 weeks I have been finding consistent success with the short sided swing trade which I've been sharing and reviewing with private Art of Trading members! Since August 15th we have taken on 8 short sided swing trades all of which have produced profitable short term gains!
So, how do I spot these short trades that have been producing consistent results?
Basically just the same as I do with my core long sided strategy. I look for, spot and track Bearish Power Earnings Gaps! A Bearish Power Earnings gap follows the same concept as the Power Earnings gap but instead of going long you look to do the opposite and go short the bearish PEG!
A “Bearish Power Earnings Gap” (B-PEG) is basically a stock that gaps down after reporting weak earnings and closes the day by printing a very strong weak candle. A candle that closes at or near LOWS of the session, this is the most ideal and perfect “Bearish Power Earnings Gap” candidate! Volume will be automatically huge since it’s coming on news of an earnings report so that’s going to add even more conviction to the move since institutions are likely evacuating the name! Remember, it is important for the small players (us retail traders) to follow in the footsteps of the BIG GUYS (the institutions). Following these foot prints can be extremely profitable if you know what to look for! Stocks that gap down (especially stocks already in a confirmed down trend) on HUGE volume and close near the days low, are doing that for a VERY good reason! If the BIG sellers see future weakness, I want part of that too!
I use the B-PEG strategy often to look for stocks to short. I add these weak stocks to my watch list and I use technical analysis to find a great entry and when I feel the time is right, I take a trade! Remember you want to SHORT stocks that are ALREADY weak and this is a great way to spot these stocks and execute upon the weakness!
Just the same as a Power Earnings Gap you want to spot, track, and stalk the Bearish Power Earnings Gap for the ideal entry! I use classic technical analysis to spot, plan and trade my ideal entry, targets and stop losses. Here are some common patterns you could use:
I've been sharing these types of bearish technical patterns and setups on my Trader Stewie "X" feed lately. Here is a TEXTBOOK step by step example I shared as the trade developed and ultimately broke down lower $RBLX:
The Stock posted a Bearish Power Earnings Gap. This is the "tracking" phase where you add the Bearish Power Earnings Gap to your bearish watchlist!
Slowly and patiently you stalk the setup! As the stock traded through a consolidation pattern day by day the next potential move becomes imminent and in this case since the stock is acting and a bearish manner the next move is likely down!
The very next day the stock shows it weakness and starts testing the Bearish Power Earnings Gap lows. Now you have a technical setup to build an ideal entry, (buy) stop loss, and downside target! In this case it was a bearish pennant type pattern!
Shortly after $RBLX tested the low of the Bearish Power Earnings Gap it broke support and accelerated lower! The $26 - $25 downside target starts to become more likely as the stock is showing signs of downside follow through!
The Stock trades down into the $26 price target! With short setups that accelerate lower, quickly like this example its usually best to book at minimum a 1/2 sized gain. Fast moves like this have a tendency to reverse as RSI becomes further oversold!
Shortly after the strong move lower $RBLX did in fact reverse but only to the point of a retest of the Bearish Power Earnings Gap low! This retest of that price point ($29 area) could offer a secondary short entry to squeeze more out of the trade or a whole new trade entirely!
Do you have any other recent examples I could review myself to become more familiar with the process?
Yes! Two recent examples that have shown relative weakness after posting recent Bearish Power Earnings gaps are $SQ and $WOLF!
Analyze this $WOLF chart and apply classic technical analysis and the technical pattern setups provided above see if you can come up with a plan for the trade!
Here is an additional educational post that I created to help create confidence while trading stocks short! It has many educational strategies that could help with your strategies!
Additionally at the bottom of this post I have provided a list of other educational blog posts that could help you with this very topic! Have a look when you have time!
I hope you’ve thoroughly enjoyed this update and small “trading guide” if you will. My goal with the Art of Trading is to create more confident traders and hopefully this guide can potentially instill some confidence in you too!
Cheers and happy trading,
Art of Trading