How to Profit as Stocks Fall

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By Jeff Clark

It’s fun to make money as stocks move higher. But my favorite trades have always been the ones where I’ve profited by betting on the downside.

Maybe it’s twisted… but there’s a special thrill that comes with knowing you’re making money when almost everyone else is losing it.

That’s why I’ve always loved bear markets. And I’m looking forward to the day when this current seven-year-old bull market hands the reigns over to the bear.

In bear markets, there is no such thing as a long-term position. The gains come fast (stocks fall faster than they rise) and traders have to act quickly to lock them in.

Today, I’m going to share one of the chart setups I use to profit as stocks move to the downside. It’s the type of setup that often occurs just as a stock is peaking and rolling over into a correction phase. It’s called the “bearish rising wedge”…

The bearish rising-wedge pattern provides an early warning sign that an uptrend is coming to an end – at least for the short term. A breakout from this pattern can generate quick, short-term gains for folks willing to bet on the downside.

The pattern forms when a stock is in an uptrend – making higher highs and higher lows. But the distance between the highs and lows gets smaller.

Here’s an example that I shared with my Stansberry Short Report subscribers last week. It’s a bearish rising wedge on Pan American Silver (PAAS) – one of the best-performing mining stocks of the past six months…

Shares of PAAS had been in a solid uptrend from mid-January through last week. In just seven months, PAAS rallied from around $6 per share to $21 – a gain of 250%.

Selling short shares or buying puts on PAAS during that seven-month period would have been a disaster. But even in uptrends, there are opportunities to trade stocks from the short side. The bearish rising-wedge pattern helps to pinpoint those opportunities.

The blue lines form the support and resistance lines of the rising wedge. You can see how they came together as the stock approached the apex of the pattern. PAAS was poised to break the wedge one way or the other… quickly.

There was no way to know in advance which way the stock would break out (up or down). But there were clues…

For example, the moving average convergence divergence (MACD) momentum indicator at the bottom of the chart showed negative divergence. In other words, as the stock kept rallying over the past month, the momentum behind the move was falling. That’s a good sign that a stock may be ready to break down.

Also, the more “touches” a stock has to the resistance line at the top of the wedge, the more valid the pattern is, and the greater the chance for a breakdown. In this example, PAAS had tested the resistance line of the wedge three times. That’s the minimum number of touches I look for to validate the pattern. This action suggested the most likely move would be to the downside.

Here’s what happened next…

PAAS broke the rising-wedge pattern to the downside. The stock fell roughly 13% in just two days.

The rising-wedge pattern helps identify short-term trading opportunities to the downside. The closer the stock gets to the apex of the wedge, the sooner the move is likely to occur. And when stocks break down from this pattern, the first push lower is usually enough to generate a good profit. As I wrote earlier, stocks tend to move down a lot faster than they move up.

Right now, the charts of many stocks and sectors are forming bearish rising-wedge patterns. Traders who can spot this pattern early enough can earn fast profits as stocks fall.

Best regards and good trading,

Jeff Clark