How to Identify Them
Topping patterns have undergone dramatic changes in the past decade due to Market Structure changes which have created new types of venues, orders, routing, and Market Participants.
Once the new topping formations are identified, the next analysis must be where small, minor non-reversal runs aka bounces will occur.
Identifying selling short bounce areas in a Downtrend stock is one type of the analysis that all Sell Short Traders need to do prior to selling short.
It is also a critical analysis for Position Traders and Long Term Investors to determine the best exit strategy, IF they decide to sell the stock.
Ultimately selling into a bounce has lower risk, for a late exit out of a stock by a Position Trader or Long Term Investor.
In the chart example below, ideally these two longer hold groups would already be out by now, using tighter trailing profit stops as the stock revealed topping action.
The top is clearly defined, where it will encounter Buy on the Dip investors and traders is relevant to how and when these two groups buy which is usually percentage based.
Identifying selling short bounce areas begins with the first bounce area typically caused by Small Lot Investors or Retail Traders using “Buy on the Dip” strategy, unaware that they are buying into a technical downtrend.
Martha Stokes CMT
TechniTrader technical analysis using StockCharts charts, courtesy of StockCharts.com
Chartered Market Technician
Instructor & Developer of TechniTrader Stock & Option Courses
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