Fly Fishing the Stock Market: How to Search for, Catch, and Net the Market's Best Trades

PULL-UP PATTERNS

When markets trend down, prices tend to fall rapidly, followed by bounces back to falling resistance represented by the 21-, 50-, or 200-day EMA. These pull-ups provide good shorting opportunities. This pattern is very similar to pull-back patterns in uptrends. The main difference, however, is the speed at which prices drop and bounce because of higher volatility. Often, the catalyst for these pull-backs is a fundamental piece of good news or a bullish technical pattern, such as a falling wedge or double bottom. Whatever the case may be, any positive developments in a stock priced at the bottom of its price channel, stretched far from value, can cause a sharp rally. In such situations, bulls are quick to grab shares while they're cheap, and bears rush to lock in gains by covering. Both actions lift prices toward resistance rather swiftly. At resistance, rallies stall and consolidation ensues. The underlying weakness of the bear market prevents prices from extending above their 50- or 200-day EMAs. The 50- or 200-day EMA is the zone where shorts reload and longs take profits. This zone can generate great shorting opportunities.

Figure 8.18 illustrates the technical formation of this pattern in the SPY.

FIGURE 8.18 Bear market rally stalls at the 200-day EMA.

SPY, daily, indicator set #8.   • The market rallies from a double bottom (A–B).   • The rally stalls as it penetrates the 200-day EMA and forms an MACD bearish divergence (C–D).   • A false upside breakout ...