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Bearish signals and bullish trends

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Those subscribers that took advantage of our yearly subscription offer and are perhaps incorporating some point and figure analysis into their strategies are seeing some bearish chart patterns take place in stocks they're shorting/putting based on the favorable probabilities from Professor Earl Davis' study. Here's a quick look at two stocks we've mentioned in the last week or two that gave bearish chart patterns on their point and figure charts and how things are progressing. Neither one of them have completely fallen apart, but bearish traders can perhaps use one to understand the other.

Celestica Chart - $1 box

We pointed out the "bearish triangle" pattern in Celestica (NYSE:CLS) last week. The stock did fall, but seemed to find support at the bullish support trend. One subscriber noted heavy open interest in the February options at the $40 strike that may have had something to do with the stock holding tough near $39. Today's trade at $37 was enough to violate the bullish support trend and now the trend becomes bearish with the bearish resistance trend (red +) being the overriding trend. Just taking note of how the bullish support trend may have been near-term support, even though the pattern was/is bearish. The "bearish triangle" is the "quickest" pattern for profitability at 2.5 months on average that was identified by Professor Davis and is a favorite among bearish traders as the "triangle" seems to build tension between the bulls and bears. The break of the triangle to the downside is bearish and sometimes gets the bulls to cave in and sell the breakdown.

Citigroup Chart - $1 box

We also pointed out the "triple bottom sell signal" in the chart of Citigroup (C). This too is a bearish chart pattern. Professor Davis' study found this pattern profitable for a bear 93.5% of the time, for an average gain of 23% in 3.4 months. This is a favorite among bearish traders due to its % of profitability at 93.5%.

While Celestica (CLS) and Citigroup (C) belong to different "sectors" both the technicals are somewhat bearish. I'd say that Celestica's chart is more bearish and that stock has more of a "tech flavor" to it. Not only that, but as mentioned before, Celestica is an OEM for many networking equipment company's like Cisco Systems (CSCO). With networking stocks having some trouble once again due to the continued slowing in Telecom, we liked a bearish trade in Celestica on the break of the triangle. Now that we're seeing a break of bullish support, that analysis looks to be bearing fruit for subscribers short/put the stock.

Combining both vertical counts and the probabilities from Professor Davis' study can be compelling. One warning though! Always check the relative strength of the stock that gives the bearish chart pattern versus the broader market and a corresponding sector. Whenever possible, try and short/put weak stocks. The best way to check for weakness is the relative strength measurement.

Jeff Bailey
Senior Market Technician
Option Investor

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