Trading a Bearish, Broadening Pattern
Markets made new all-time highs while both long and short trades were working.
You may have heard me mention that I prefer to trade the charts instead of relying more on my decades of fundamental analysis education and experience.
It might sound crazy, but there are good reasons behind my love for the charts.
Working with portfolio managers that took pride in fundamental analysis was eye opening.
You learn a lot working with brilliant investors managing billions.
The fund I was working for spoke at length about their due diligence and meetings with management teams. They took pride in getting an inside look at a company.
I added to that knowledge by spending years at a Fortune 500 company as an analyst helping produce our quarterly numbers.
The pressure to hit your numbers cannot be overstated and the drive to hit them can push some people to reach impressive levels of creativity, which is not what you want.
The big take away from both experiences was that there are far too many variables for the average person to be able to forecast reliably.
Honestly, I don’t know how anyone can try to predict the direction a stock is headed based on fundamentals alone. I have trust issues with this data.
And this is precisely why I prefer technical analysis, talking about patterns over balance sheets.
You can argue that news events will override any pattern and I would agree.
I would also say that news events can also ignore fundamentals.
A pattern on a chart is what it is. There is no hidden data in some footnote or buried in any fine print.
There are no accounting tricks, lie detector tests, or lengthy reports to dig through.
And you can define your time frames much more clearly with a chart.
Compare that with trying to predict the timing of impacts to the stock price based on changes to business operations or accounting methods.
The simplicity of reading charts really is appealing.
This is especially true when we are facing a myriad of variables that impact the markets in significant ways.
And there is never a shortage of variables.
Inflation, rate hikes, unemployment, war, trade restrictions, the list goes on and on.
The beauty of a chart is it always has the same elements, and if you’re lucky, a familiar pattern or two.
With that, let’s take a closer look at a pattern I like to trade.
The Bearish Expanding Triangle
Quick shout out to WOLF Financial for the chart pattern graphics. Hands down the best Spaces host for financial content on X.
As a trader, it is important to identify these patterns early, allowing you to be prepared to take advantage when the opportunities pop up.
When identified early, the Bearish Expanding Triangle is a pattern that can be traded for big gains.
The chart for Pepsico Inc, PEP, gives a great example.
If the bottom of this expanding triangle breaks, expect PEP to follow up with more downside. This presents a nice short trade opportunity after the break and retest of this lower level of the triangle.
Notice the declines that took place in the months prior to starting to form this pattern.
Momentum is not with PEP and despite the recovery, there is obvious downside risk and I would keep a close watch to see if it retraces back to the top of the pattern.
The most recent attempt fell short, which is another bearish signal to note.
Take some time to review your watchlist, keeping watch for patterns like the expanding triangle to take advantage of for a short-term trade.
And if you have Trendspider, you can use the filters they have to automatically scan for triangle patterns and breaks to the upside and downside.
It really is an impressive tool. Be sure to check it out with the link below. I think it is worth every penny for serious traders.
Have a great day trading!
-Nate
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This service is for general informational and educational purposes only and is not intended to constitute legal, tax, accounting or investment advice. These are my opinions and observations only. I am not a financial advisor.