Bearish Pattern Trading with Defined Risk | Technically Speaking: Breakouts & Reversals
good morning good afternoon wherever you may be john mcnichol here and welcome to technically speaking breakout reversal patterns our topic today we'll take a look at a few bearish uh breakout patterns some of them may be bearish reversals as well and we'll do some practice trades so stick around all right hey it's great to see those that are live with us today such as wayne krishna sebastian alfred nourov vj we got lou todd mike rhonda el diego tony and everyone else connie hill is helping us today on the chat connie thanks for helping out with us today any questions i'm unable to get to she'll be more than happy to help you can see my twitter handle on the screen at j mcnichel underscore tda if you wish to follow myself along with other fine instructors such as connie her twitter handle is at chill underscore tda that's c-h-i-l-l underscore tda a kind of a cool twitter name with the first initial last name there so let's go and take care of disclosures folks we'll get right into our discussion content is intended for educational information purposes only non-investment advice recommendation of any security strategy or account type options not suitable for all investors please look at the previous voted copy of characteristics and risk of standardized options uh keep in mind uh spread straddles of the multi-leg option strategies often involve greater more complex risk including multiple commissions understand the risks of a long option position as far as the entire premium can be at risk as well as with short options with the risk of assignment likewise make note of uh commissions there and important factors should be considered when evaluating any trade while this webcast may discuss technical analysis other approaches include fundamental analysis may serve very different views and a stop loss order will not guarantee an execution at or near an activation price once activated they will compete with other income and market orders now you're encouraged to practice what you learn here today with tools such as the paper money software that application is for educational purposes and successful virtual trading during one time period does not guarantee success of actual funds during a later time period as market conditions change continuously there's brief bio if you have to be new to the webcast welcome please let us know if you are new in the chat there so we can give you a hearty welcome here's a brief background for those of you that are unfamiliar uh with me as far as what i do with education here at td ameritrade and here's our agenda i'm going to talk about some bearish breakout examples and get some practice trades in and so without further ado let's go and bring up the thinkorswim platform and good morning to you monique thanks for joining us as we try and get my screen in order here let's see if i can go ahead and take care of it that way all right so uh we we've been seeing a little bit of a pullback in the market uh over the last couple of sessions uh you know prices have attempted to come off of their lows and then kind of went a little bit lower attempting to come off the lows again uh trends still intact you know traders uh may look back at previous highs where broken resistance may act as new support and you know we'll see if we happen to reach or or break that particular support that's the same uh i think as we look across the board the nasdaq which is uh still kind of hanging around the upper part of its longer term channel uh did have more of a reversal day as we're making a low on the week and we'll see if that momentum continues into the rest of the week uh the dow which uh got uh hammered pretty hard yesterday particularly with a lot of the industrial stocks uh had sold off uh dramatically notice make in some lower highs and when one recognizes from a topping pattern or from a top when you see price action making some lower highs is take a little further back and look at a previous high so we're seeing high higher high lower high that potentially could be a setup for a head and shoulders top which would be more of a bearish reversal i notice we have a bit of a confluence here as prices have sold off uh i have a 55 day exponential moving average some traders may use a 50-day but i'm using a 55 kind of the fibonacci series that i have a tendency of utilizing so it knows a bit of a confluence with that support if we look at the lows and this would be something that technicians may be keeping an eye out you know whether you look at it from a horizontal or a little more of a diagonal what have you uh a let's try and scope that again there could always right click but uh looking at uh that price action you know as far as support is if price uh breaks down and holds uh below that neckline that would be a sign of a bearish reversal and traders may look at the distance between that support and resistance and you know what we've done in this class as far as patterns is going into drawing tools and uh identify the uh a rectangle and we can highlight over that area the drawing tool is a little touchy today highlight over that area so we got a compensating for price as well as for time and i can go ahead and right click on that activate that drawing and kind of push it down to where a perspective breakout point is and if prices were to break down and make a similar move to the downside there was a bit of confluence with those lows back in july now not a foregone conclusion but something to kind of keep an eye to see if whether prices stabilize make a higher low or if they continue failing and breaking down and finally with the russell which we've looked at quite a bit and recognizing that overall sideways trend the market's been in year-to-date see kind of the support that it's held multiple times throughout the year likewise we can also see that resistance as well uh didn't quite uh make up to some of those previous resistance that can point towards a little bit of weakness but we can also see potential for support as we're in the mid-range kind of more middle and another reversal pattern that we had kind of more of that double bottom or w pattern that price did break out a couple weeks ago and we did kind of blow back into that pattern still making a higher low but if prices do continue breaking down we're kind of more still in the mix or the rut no pun intended or intentionally intended maybe more neutral as the price action still in that range okay you know obviously apply that in in previous sessions you know we've taken a look at some of those different sectors and as we look at individual stocks here today we may see some of those similar patterns there so for instance let's say as a starting point i'll look at some examples of some bearish patterns financials have been relatively weaker let's take a look at wells fargo wfc as we look at wells fargo you know from an intermediate uh term you can see how price action was more on an uptrend uh since the spring we've seen that price action kind of uh vacillate a bit there back and forth we can kind of get some ideas as far as support areas then we can also see as far as with the price action how we're starting to see lower highs lows as well as lower lows so with some of the shorter term averages you can see clearly on how those shorter term averages falling and with a sharp move down in price having a small consolidation so what traders may refer to as a bearer flag and so far as far as on the day you know we do have an example of a kablood as the price is trading below the low of that high day kind of more of a bearish bounce some traders may look at that previous move down although this is a relatively stronger move down uh taking a look at a trend line here you know we can go ahead and draw from that high down to that low form in the poll we can go ahead and right click on that so we do a duplicate and then go ahead and projecting from the top of that flag pattern to a potential downward target notice as we kind of blew this out a little bit uh that seems to be targeting kind of the lower part of a longer term channel that i've had with uh wells fargo if you go back over a couple of years here this is where the important is you know regardless of time frame is being conscious of what's happened over a longer term and this is what wells fargo was doing prior to covin it was already dealing with a lot of the negative impact of uh false accounts and um and things like that uh they sunk on kovid basically recovered and kind of interesting on how it basically got back in to its previous trajectory uh didn't reverse out of that longer term trend so something to be conscious of whether you're a short-term or an intermediate uh trader investor is you know being conscious of what happens uh from a bigger pitcher and notice there's a bit of a confluence if this price was to break down you know with some of that previous price action so i'm going to go ahead and we'll take a closer look at this and if we want to put an example of a trade keep in mind there is an earnings event that is coming out uh next month some traders may look to speculate during that others may be looking to possibly close prior to that event so we can go ahead and do an example of you know whether a a long put another example that we've done is a long put vertical which would define some of that risk and reduced cost of the trade some of you may enjoy selling premium uh may look an example of a short call vertical okay let's kind of focus on these two examples here and see uh what comes up and i'll be happy to hear some of your suggestions uh on that so we're looking at wells fargo uh let's say we'll go ahead and look somewhere at around 20 to 40 days out october falls you know in the 37 days there now when it comes to volatility volatility may more likely increase for two reasons one if we're on a bearish trade volatility does have a tendency of rising uh two uh since we are going into an earnings event uh in about a month uh volatility uh would typically rise too so that could be one of the uh filters there as far as doing a short call vertical which would benefit from fallen volatility not so much from rise and volatility so if we were to go ahead and look at a long put vertical we may go ahead and take a look let's bring up our greeks look at a strike that may be a little bit uh in the money if we're looking at a little more for a higher probable uh trade because the strike that we'll select is where we may expect the price to be trading down to uh over the next 30-some days or hopefully sooner to be able to capture that game uh so if we go and look at the chart you know we can see different levels there's 4250 there's 40 there's 37 or actually 39 i should say so if we're more directional we may be selecting a strike that is near that level so in that case uh could potentially even be a 40 strike well let's go and start off with the 45 and the 42 and a half i'll just go ahead and right click on the 45 i'm going to do a buy vertical and notice what that does we're buying the 45 we're selling the 42 and a half that's a debit of a buck 19. uh that's uh certainly less than if we paid for the 45 strike by itself uh which in this case would be 247. now keeping in mind there is a trade-off we are capping our gain basically to that shorter strike and so with that uh if we go ahead and click on confirm and send we can learn a little more about the mechanics of the trade our maximum loss is going to be 119 which is the basically what we paid for that spread uh the maximum gain is going to be 131 dollars now that's based off the price trading at or above 42.50 at that october expiration okay uh 15 october now it can take some time for that to occur may not even occur uh one idea is if we're able to capture about 50 percent of that maximum gain so if there's a quick move to the downside we may be able to capture about half of that gain in this case that would be about 65 bucks now the other attraction as far as with the trade is the break even 43.81
uh right now we're at 43.87 it doesn't take much of downward movement for this price to be for this trade to be profitable at expiration so a little bit of a trade-off there as far as a a better break even uh by giving up uh a greater game all right now if you have any questions of what we're talking about please feel free to share on the chat notice there are commissions there as well the other traction here is we can position size this to a defined loss most we're willing to risk on let's say we're willing to risk about 500 on the trade we should be able to do this four times i'm gonna do edit and we're gonna change that to four confirm and send and notice there we go there's our potential max loss and there's our max main max loss would be realized if the price actually goes up goes through the spread would define that max loss now if we go ahead and edit that now if one wanted to be a little more directional just so you can see some comparisons and you're encouraged to practice different ways uh you know let's say one was swinging a little more you know for the fence a little more distance there if i was to change this one the short strike to a 40 you'll see a bit of a trade-off one the spread widens so now we got a five dollar wide instead of a two and a half dollar wide two uh we pay a little more for that debit but if we go to confirm and send we can see greater potential gain although will be a little less probability because that's a i think a 20 delta strike that we sold and notice the break even is going to be a little bit lower meaning the stock needs to work a little bit harder to be profitable so there's always a trade-off there and so something to consider uh we'll go ahead and we'll stick with the 42 or the yeah 42 and a half we'll go ahead and do a confirm and send and we'll send that off and we went ahead and we got that practice trade filled now looking at the questions here so what we did was an example of a bearish trade and you know a lot of new traders may not be familiar on placing some of those bearish trades but the options market does provide an avenue to profit from a downward move while also defining some risk unlike other things such as shorting stock which requires that margin and also the unlimited risk to the upside uh options do provide uh the opportunity to profit from some of those downward moves now uh tony asked a question john do you always set up uh your debit spreads with both sides at same distance from the current price what about put debit spread just out of the money or just in the money pros and cons so hopefully i kind of address that a starting point you know as far as probability it wasn't necessarily equal distance from the current price but an option that is in the money versus the other option that may be at the slightly out of the money may have more probability than if one did an at to and out of the money because price needs to move farther so it's a combination of where that spread is relative to price and also the distance between those strikes as well and again the encouragement is to practice this on your paper money account so you can go ahead and see that impact when i go to the trade tab as many or many of you may or may not know is when we go ahead and we look at the options and we bring up what we call intrinsic and extrinsic value we know that one of the issues as far as with buying options is that time premium that you pay that time premium that is paid and dissipates over time so notice in this case with our example uh even though we're kind of at to out of the money so this one's even a little more directional here is we paid a dollar 32 in time but we sold a buck 25 in time so we actually have a basically just paid about uh was that about seven cents now a little yeah about seven cents and seven half cents in time premium so we basically reduced the over cost of the trade and negated or at least greatly negated the impact of time okay and if one wanted to be even a little more probable they may have gone a little more deeper into money and if they went ahead and sold that time you would actually be positive time meaning that you would actually benefit from the passage of time it would also give you a a closer uh break even okay so pros and cons so hopefully you learned something new with that and isaac i'm not sure what the why uh addresses there but uh uh if you can be more specific be happy to cover that all right so we did one on uh wells fargo let's go and take a look at another one here i think another one was looking at earlier uh chewie had been a popular name on the online pets there chwy as we go when we take a look at uh this example uh we can see it's had its uh downs and ups and downs uh post earnings uh you know it has a gap down look at this from more of a longer term basis you can see that longer term trend so keeping that in mind and even from the longer term uh we're seeing lower high we've seen some lower lows looks like there's attempt at a reversal here and we're basically coming back down below some of those previous lows and even getting below some of the major weekly averages so if i go back and take a look notice that price action did take out that low although a little bit of indecision there could be a potential bounce here and some traders may be more optimistic and look for that but if i want to do an example of a a bearish trade here and okay i got your question there isaac i'll address that in a few if we want to do the same thing on this example we can go ahead and go up to the trade tab do the same thing as far as with on the put side let's go and bring up the greeks and if we go ahead and look at you know with some of the examples uh let's say if we did go a little bit deeper into money and it points your attention so here's a 65 delta uh there's 75 or i should 75 strike and a 70. so go ahead and look at this you know perception is well where does one see the price possibly trading down to if it breaks below that uh support well we already have an example of a uh head and shoulders here and shoulders top that transition of price making higher highs to lower highs those of you that may struggle in identifying some of those highs and lows nice little handy tool that i share often under the patterns tool select show patterns select patterns and we'll go to those candlesticks called williams fractal nice little handy tool to identify we'll double click on it to add that identify some of those highs and lows so you can potentially pinpoint some of these various reversal patterns such as a head and shoulders now on earnings it basically broke down below that neckline and if we go ahead and actually measure over that pattern at least attempting to a little bit better there we can right click on it activate the drawing and move that down you know i mean we can see that it actually made most of that potential move that doesn't mean it can't go lower particularly if we take out some of these previous lows but some traders may wait for it to maybe rise up a little bit and possibly look for it to roll over again i'm going to go ahead and do another example of that spread and even if we're not picturing it to go down dramatically farther you know it looks like the lower end's around 72 you know there's 70 in that area there so if we go back to that even if i did a uh an 80 75 i can go ahead and right click buy vertical there's the debit that's the risk on the trade if we go ahead and go now notice we're already below that short strike an assignment can actually technically occur at any time although on your practice account it will not so you have to be conscious of that however that's not necessarily a a bad thing as we do have a long option to offset it as far as with that gain and we would get to keep the premium that we had sold notice the break even on this is 76.90 if the stock stays below 76.90 this
would be a profitable trade so a little more of a higher probable trade if we go back uh 7690 7690 would be basically right above you know the previous day if we're assuming that this previous support may act as new resistance then we have a break even that's actually above that point now we're still a little close but go ahead and look at that now when i go and go to confirm and send now notice compared to the other trade the maximum gain is going to be less than the maximum loss that's because we're more deeper into money it's more of a higher probable trade for profit okay it's not a guarantee there are commissions there if i did want to me be more directional you know i can change that to a 70 if i expect it to trade below 70. now we got a 10 dollar wide hit to confirm and send notice there's a maximum gain a little bit more but our break even is much closer to the current price okay so for this example because i haven't done as many of these i will keep this a little more uh on the in the money side to add to in the money there so let's go back to that 75 and we're gonna attempt to do the same thing as far as managing if we're able to capture about 50 or more of that maximum gain to look to scale or close out the position so i'll do this two times do confirm and send and hopefully you can see that once again the attraction as far as with you know relatively small amount of capital that's locked up to practice doing a bearish trade okay so we'll go and we'll send that off and i'll double check to make sure that that gets filled so again the question was asked uh by isaac on well how about a call vertical instead now i'm assuming you're saying a short call vertical uh in the case of a bearish trade and that can be an option to do uh if the idea here and we you can make the comparison uh we'll we'll stick with chewy for a moment we can basically sell an out of the money call spread above the current price with the expectation that the price would go lower or at least stay below that spread in the case of the put spread the long put spread we actually wanted to trade through it that's a desired outcome when one selling spreads out of the money spreads we want them to stay out of the money okay and with that in mind if i went ahead and took a look at the trade tab and looked on the call side as we teach on our spreads there is we have looking more out of the money at 30 to 40 delta to sell so we can sell about two dollars and 23 cents and then buy a cheaper option that's a little bit further out so we're looking at this 80 85 range there okay so we go and look at the chart you know we're kind of a little at support there not breaking down as much as i would have liked to have seen earlier but just an example we're looking at the 80 let's make sure i got that right yeah it was the 80 and the 85. so if i go ahead and just mark this on the chart i'm going to go ahead and remove this drawing i'm just going to draw another rectangle here so between the 80 and 85 in that range if we sell this spread the expectation is the price would stay outside of that level and you know not too bad those gaps can act as resistance and so you know we're looking at a reasonable area there and if i go back and right click on that 80 strike now we're going to do cell and do a vertical and we can see what it adds up here so now we have a credit of a dollar nine that's the most we can make on the spread so notice as far as contrast our gain is going to be limited our loss is also going to be limited too but notice that the loss would potentially be greater again this is more of a higher probable trade for this to be profitable the stock just needs to stay below 81.09 if it's below 80 at expiration that would be a maximum gain okay let's do this by as a contrast here i'll go ahead and i'll actually uh i'll do this two times and we can actually see how both of these play out these are both bearish trades however one is going to benefit more from the passage of time and if volatility falls which is not likely to happen in the case of if price does fall but would benefit from the passage of time i'm going to go and send this through and looks like we got that one filled we have to go back and go to the monitor tab and looks like our put vertical didn't get filled yet i'm going to right click on that cancel and replace you'll notice when you look at the price action natural price is the market price mid is right in between sometimes if there's a little bit of a distance there one may have to try and you know come in a little bit closer to have a marketable order okay yeah and great appreciate the comments on that dylan yeah we can compare this next week and guess what you can do the same thing uh when you're considering the pros and cons of one spread versus another is you know go ahead and do both of them on your paper money account uh as i mentioned before i preface this with a bearish trade when prices fall volatility has a tendency of rising so that's really not going to benefit uh selling strategies as much whereas with long strategies would benefit from that rise in volatility now there is going to be a little bit of a negation there with a spread because one would offset the other but the reason for doing the put vertical was an expectation for price to fall a little more directional on how we set it up but still give some room to have a break even if the price does not fall as much as anticipated so a little more forgiven uh in the case of the long call vertical we looked at that was more of a higher probable trade where an out of the money spread is sold preferably above resistance with the expectation that price would stay below that area now that would take some time for that price of decay and if the price does drop volatility has a tendency of kind of slowing that decay so one has to be patient with that particular example but in the case of our long put examples we'll go ahead and look to manage those for some profitability now i'm not sure if uh i may have some spreads here i got some individual calls and puts um in here let's see if i do have an example that's close to profitability there and mostly longer options here but what we'll do is we'll add those examples here and you know one of the things here there's a column you can add for p l percent uh and on a debit spread it basically gives you the percentage return on that debit and uh although that's not necessarily gonna be 50 of the maximum gain but if i start seeing this as an example being at around 50 percent or more may go ahead and look to manage uh the exits for that the other way of managing is as we get closer to expiration uh particularly in that last week uh so uh in some of these in my long diagonals and verticals class which you can join me on thursday we got some trade management to do as we go into the end of the week as we're coming into some of these short options coming up to expiration we'll look at the same thing with those verticals whether a we're able to capture a particular profit game or if we don't realize that then look to close it out in that last week seven to ten days before expiration all right folks looks like we got a little bit of time here uh don't want to um put all the bears uh you know down there uh you know we had a couple examples some other examples that you may want to take a look uh similar setups to what we had with wells fargo here's visa trend is down a little more movement to the upside today but that broken support potentially acting as resistance potentially a bear flag uh axp you know another kind of in the financials here looking at axp earlier as far as looking at that low you know a breakout to the downside looks like it's still holding that support more of a semblance of a descending triangle an example of a bearish continuation fallen trend horizontal resistance uh if this price was to break down some traders may go ahead and measure that pattern and project out a potential target to the downside if it breaks down if you want uh you know one can go ahead and right click on the chart maybe create an alert and if the price goes at or below you know that may simulate or stimulate some action okay uh let's see tel doc tdoc just kind of give you you know examples of some other patterns uh this is a kind of a larger flag on what traders would refer to as a ryzen wedge i've talked about this in some previous sessions on stocks particularly on the tech side and discretionary that have broken down uh since uh in the uh summer or late spring knows price action breaking down some traders may go ahead and measure you know a previous swing down and project out a similar move then the last one in this group in here i lmn lumen you can see the characteristics of a head and shoulders uh we're getting below those moving averages those that joined us last week we talked about moving average crossovers notice we're seeing negative crossovers here potentially confirming uh that top in formation now some traders may look for a you know breakdown out of this wedge here you know we did have a little bit of a bearish bounce but looks like it's kind of hanging out there a little bit all right and then uh let's see as a as a bonus here uh so we won't uh leave everything uh on a bearish note uh take a look uh at a uh a stock that has been beaten down but maybe showing signs of a bullish reversal and let's see i think it was mnst actually no it was actually it's actually one of the staple stocks although uh munster may be attempting to uh retest where it had broken out before kind of get a little more of an inside day i believe it was actually khc craft heinz which has a uh long range day kind of bullish reversal kind of engulfing basically the last two weeks of price action now when one goes ahead and takes a look at it you can see well john that's a down trending stock why would you know one consider something potentially bullish remember at the beginning of the session talked about time frame and look at things from a bigger picture if i go ahead and take a look at this from a three-year chart we can see that longer term it's making higher highs and higher lows this pullback that it's done for how steep it was notice how this pullback basically came back and retested where it had broken out earlier this year now this is not a foregone conclusion that the price would bounce and reclaim those highs but you can see possibly attraction as far as investors looking for some value applying little fundamentals there and the way interest rates have been unless they cut uh their dividend which can be at risk they have a dividend yield of about a little over four percent uh finally uh got a little fibonacci uh action on there haven't talked much about fibonacci may do that in some upcoming sessions uh as warranted uh but uh a retracement although it did cut a bit deeper we are getting kind of around that pivot that's 61.8 retracements what investors
or technicians may call a make or break point there's a lot of confluence with this previous high so at least an attempt on a bounce you know that could potentially fade and what i'm just going to do here is i'm just going to right click on the chart uh do a buy custom with stop and i'm just going to go ahead and set a stop uh a percentage below the low of the week or on the low range so we look at the low of the week about 35 38 let's say i'll just do three percent below that 35.38 times 0.97 that would be about 34 31. so i'll go ahead and i'll use that as an example for a stop now keep in mind stops are not guaranteed to fill at that price if it goes in and trades down to that level it will trigger a market order so we'll compete against with other income and market orders i just want to make this a gtc for good till cancel do a confirm and send so we got an example of 100 shares i'll do 200 for this example and based off of position sizing you know one can see what that allocation would would be and go and click send and there we go all right now i don't see any additional questions there but there's a couple things i'd like for you to do number one practice what you learn here today we identified some common bearish patterns particularly head and shoulders tops bear flags ryzen wedges are all discussed in our technical analysis course we also did some practice trades focusing on some defined risk with some put spreads for our bearish trades and then we rounded things off by doing a practice bullish stock trade again attempting to find risk with some position sizing and utilizing a stop loss as an example once again practice what you learn if you enjoyed what you learned here today too consider clicking like on the video so that way everyone else has an opportunity to hopefully learn something new and this is part of the trader talks channel a great thing for you to be able to stay in tune to these webcasts is actually click and subscribe uh and that way turn on notifications too and whether it's even on your phone if you follow you know logged in on google uh or on your computer you can be stayed up to breast on what upcoming webcast we have so let's make sure in summary we covered on what we said we were going to cover today bearish breakout examples i probably should have put in a second bullet there since we did talk about spreads define risk with some put spreads there but we certainly got some practice trades in today and once again encourage you to do the same i like to thank connie for helping out on the chat more importantly thank you for joining us each and every week make sure you consider following us on twitter and once again click like and subscribe to the trader talks there i wish you all to have a wonderful day and we'll talk again real soon bye now you
2021-09-10 02:42
