Bearish Technical Analysis

In analyzing a stock to short long term you are looking for a stock

that has just entered a bearish trend or one that is currently in a

bearish trend. Let's examine the major technical factors in the following

examples.

Figure 5.20 shows a chart of Barnes & Noble from March to September.

Fundamental information on the stock was negative at this

time. By May 19, it becomes obvious that a bearish descending trihigh-

probability shorting 133

angle formation was in place. The 3-day EMA had put in a top on

April 26 and moved below the 12-day EMA. The very next day, the

12-day EMA began to move lower. The lower trendline of the triangle

was broken on May 21. From that point on, the price remained

below the 12-day EMA until a short-term rally occurred on August

13. The arrow identifies the beginning of the long-term short entry

point. The next two days gave you time to enter the trade and sell

short. Using the 12-day EMA and the 50-day EMA to gauge trend

direction and strength, it becomes obvious that this is a strong

bearish trend that should last for a considerable amount of time.

Because Barnes & Noble has liquidity, and the shares are readily available to short, you begin to build a preponderance of evidence

to short the stock.

Upon examining the technical indicators, the case for shorting

the stock becomes even more compelling, as shown in Figure 5.21.

On April 29, the Moving Average Convergence/Divergence (MACD)

indicator renders a second, more powerful sell signal, identified by

the number 2 on the MACD indicator (see Figure 5.21). A sell signal

is indicated when the dotted trigger line crosses above the solid

MACD line. Note that the slope of the MACD line is in a downtrend,

with the second sell signal being lower than the first. The 14-day

 Relative Strength Index (RSI 14) topped out with a reading of 71.36

on April 9. This is indicated by the first arrow on the RSI indicator in

April and the topped notation. From that date, RSI began to move

lower. On April 29, when MACD gave its second sell signal, RSI put in

a lower high and began to move lower. This is identified by the number

2 on the RSI indicator, which is above MACD. RSI remained weak

for months, until the beginning of August. Both charts are marked

with arrows indicating the signal.

Figure 5.22 shows 12-, 26-, and 39-day price rates of change for

Barnes & Noble. Note that all three indicators are trending down.

This is indicated by the downward trendline marked on all three

ROC charts. Also note that price breaks below the support line on

the descending triangle. The 12- and 26-day price rates of change

are below the zero line. This indicates that both short-term and

intermediate trends are bearish. On the following day, the long-term

39-day ROC indicator renders a bearish long-term sell signal.

In analyzing a stock to short long term you are looking for a stock

that has just entered a bearish trend or one that is currently in a

bearish trend. Let's examine the major technical factors in the following

examples.

Figure 5.20 shows a chart of Barnes & Noble from March to September.

Fundamental information on the stock was negative at this

time. By May 19, it becomes obvious that a bearish descending trihigh-

probability shorting 133

angle formation was in place. The 3-day EMA had put in a top on

April 26 and moved below the 12-day EMA. The very next day, the

12-day EMA began to move lower. The lower trendline of the triangle

was broken on May 21. From that point on, the price remained

below the 12-day EMA until a short-term rally occurred on August

13. The arrow identifies the beginning of the long-term short entry

point. The next two days gave you time to enter the trade and sell

short. Using the 12-day EMA and the 50-day EMA to gauge trend

direction and strength, it becomes obvious that this is a strong

bearish trend that should last for a considerable amount of time.

Because Barnes & Noble has liquidity, and the shares are readily available to short, you begin to build a preponderance of evidence

to short the stock.

Upon examining the technical indicators, the case for shorting

the stock becomes even more compelling, as shown in Figure 5.21.

On April 29, the Moving Average Convergence/Divergence (MACD)

indicator renders a second, more powerful sell signal, identified by

the number 2 on the MACD indicator (see Figure 5.21). A sell signal

is indicated when the dotted trigger line crosses above the solid

MACD line. Note that the slope of the MACD line is in a downtrend,

with the second sell signal being lower than the first. The 14-day

 Relative Strength Index (RSI 14) topped out with a reading of 71.36

on April 9. This is indicated by the first arrow on the RSI indicator in

April and the topped notation. From that date, RSI began to move

lower. On April 29, when MACD gave its second sell signal, RSI put in

a lower high and began to move lower. This is identified by the number

2 on the RSI indicator, which is above MACD. RSI remained weak

for months, until the beginning of August. Both charts are marked

with arrows indicating the signal.

Figure 5.22 shows 12-, 26-, and 39-day price rates of change for

Barnes & Noble. Note that all three indicators are trending down.

This is indicated by the downward trendline marked on all three

ROC charts. Also note that price breaks below the support line on

the descending triangle. The 12- and 26-day price rates of change

are below the zero line. This indicates that both short-term and

intermediate trends are bearish. On the following day, the long-term

39-day ROC indicator renders a bearish long-term sell signal.