The Bearish Consolidation At 20 MA Chart Pattern

The bearish consolidation at 20 MA chart pattern is a bearish continuation pattern that I discovered in stocks that are likely to trend lower. Once you have identified this pattern forming in the stock, you can be quite confident that the stock is very unhealthy. The bearishness that the stock is in will make it go down even lower and sometimes lose half of its value.

the bearish consolidation at 20 MA

The chart above is what the bearish consolidation at 20 MA chart pattern looks like. This chart pattern is a bearish continuation pattern and therefore the stock is likely to move lower when this pattern appears in a stock.

The gist of this pattern is this:

  • There is a consolidation
  • Stock meets the declining 20 day moving average
  • The stock breaks down

In the chart above, there is actually 2 bearish consolidation at 20 MA. The first one appeared from mid August 2017 to mid September 2017. The stock traded sideways for awhile and met the declining 20 MA. The stock need not break down immediately after touching the declining 20 MA. Sometimes it may hug the stock for awhile before breaking down.

What will not happen is the stock will not go above the declining 20 MA. If it goes back up above the 20 MA then a change of trend might happen. Since it stays below the 20 MA all the time, the stock is deemed to be in a bearish position.

The second bearish consolidation at 20 MA occurred in late September 2017 to late October 2017. The stock consolidated for awhile and as the declining 20 MA comes close to the stock, the stock breaks down. It is important to note that sometimes the stock need not touch the declining 20 MA. All that is needed is that the 20 MA is very close to the stock as it breaks down.

Additional Criteria For The Bearish Consolidation At 20 MA

At first glance, the newbie might figure out that any stock that trades sideways and trades near the 20 MA can be considered a "bearish consolidation at 20 MA". It is not as easy at it seems.

To be able to be considered a valid chart pattern, I have laid down some strict criteria so that the reader will not simply read everything as a "bearish consolidation at 20 MA".

Here are the criteria a stock needs to satsify:

  1. The stock must be in a downtrend
  2. The stock should be below the 200 MA, 50 MA and 20 MA
  3. The stock should consolidate or trade sideways relatively tight 
  4. There should be a breakdown

Let's take a look at an example below.

the bearish consolidation at 20 MA often happen in stocks that will trend lower

The chart above is the daily chart of DDR. If you go through the 4 criteria that I have listed above, you will see that this stock clearly satisfies the criteria for the "Bearish consolidation at 20 MA chart pattern".

First of all, the stock was already in a downtrend. I did not show you the period prior to January 2017 but the stock was already in a downtrend and the sideways movement that you can see from January 2017 to February 2017 is just a consolidation after a downtrend.

Secondly, the stock is below the 200 MA, 50 MA and 20 MA. The yellow line is the 200 MA, the blue line is the 50 MA and the red line is the 20 MA. Those are the staple moving averages that I like to use and they feature in almost all the charts I use.

If you take a look at the chart, you will realize that DDR has 2 bearish consolidation at 20 MA chart pattern. The first one happen around late February 2017 and the second one happen around late March 2017. Notice how the stock breaks down when it meets the 20 MA.

The stock consolidated in a tight manner prior to breaking down and this satisfies the 3rd criteria. Finally, the stock breaks down, which satisfies the 4th criteria.

See how much the stock fell after the appearance of these 2 bearish consolidation at 20 MA. From around $15.00, the stock fell to around $8.50.

How To Trade The Bearish Consolidation At 20 MA

All chart patterns can be used as trading strategies.

If you choose to employ this chart pattern in your trading arsenal, you will actually be taking advantage of the trend.

  • This is a trend following strategy

You will be shorting the breakdowns in a stock that is already in a downtrend. So in essence you are riding the trend lower. Since the stock is below the 200 MA, 50 MA and 20 MA, this is an extremely bearish situation and therefore, the stock is very likely to continue to move lower.

Let's take a look at how you can take advantage of this chart pattern and trade it.

how to trade the bearish consolidation at 20 ma chart pattern

The chart above is the daily chart of GE. Notice how it formed a series of bearish consolidation at 20 MA. Actually this stock gave a wealth of trading setups to the trader who knows and understands this pattern.

To know whether a stock can be a trading candidate, it must satisfy the criteria to be a valid setup.

  1. The stock is already in a downtrend. Since it is making lower highs and lower lows and drifting lower, the stock is considered to be in a downtrend.
  2. GE is also below its 200 MA, 50 MA and 20 MA. You can see how all the moving averages are sloping lower. This is a sign of bearishness in the stock and therefore, GE is a very good shorting candidate.
  3. The stock's consolidations near the 20 MA are relatively tight and not wide and whippy.
  4. GE broke down below the consolidations

After analyzing the stock, we realize that GE satisfies all these criteria. How do we enter the stock?

Since this is a bearish chart pattern, we will be actually shorting the stock. If you are not familiar with short selling and how it works, I recommend that you read this article What Is Short Selling And Why You Want To Short Sell Stocks.

This is how you enter the trade and manage the trade.

  • Draw a box across the whole consolidation
  • Short the stock when it breaks below the box
  • Put a stop loss at the top of the box

If you go through my Trading Course, you will start to realize that we like to use boxes to analyze stocks. There is a reason why the use of boxes are so important. You can see the consolidation without drawing anything but when you draw a box across the consolidation, it makes it easy for you to know where to short the stock and put a stop loss.

I highly recommend that you draw boxes over consolidations so that it aids your trading and analysis.

Putting A Stop Loss

As mentioned above, it is very very easy to put a stop loss. Once you have drawn a box across the whole consolidation, you just put a stop loss slightly above the top of the box. Let's say the top of the first box is $27.00. You can put a stop loss at $27.10.

Stop losses are very very important because not all chart patterns will work out. Sometimes there may be whipsaws as well. Whipsaws are when prices shoot up slightly above your stop loss point and then quickly declines again. This is a source of frustration for many traders but you can't really avoid it in trading.

Pyramiding Into The Downtrend

One of the beauties of trend following trading strategies is that you can often ride the trend lower. When a stock is in a downtrend, it can often go lower and lower surprising a lot of people. The trader might think that the stock will bottom at $25 but you will never know how low it can go when it is in a downtrend.

As you can see on the chart of GE, the stock subsequently declined to $20.20!

This is where the saying "The Trend Is Your Friend" is very very true. You need to follow the trend. You need to respect the trend and you need to take advantage of the trend.

Thankfully, you have now learned a trading strategy and chart pattern that allows you to follow the trend and capture the trend.

Now let's talk about PYRAMIDING down.

I'm sure you have heard about pyramiding up. This is where investors and traders buy and average up a stock that is moving up. When a stock is in a downtrend, we can pyramid down.

What this means, is when you see another bearish consolidation at 20 MA pattern develop in your stock, you can actually short it again when it breaks down.

You can see in GE how the stock had many consolidation at 20 MA, you can just add to the short everytime it breaks below the consolidation. As the stock drops, you can move your stop loss lower. This is a technique called trailing stop loss and it helps you to capture the majority of the profits. You put the stop loss at the highs of the most recent box.

How To Take Profits

Knowing how to enter and knowing where to put the stop loss is not the only things that a trader needs to know. He or she also needs to know how to take profits off the table.

Since this chart pattern is a bearish continuation chart pattern that takes advantage of the downtrend, you can often ride the trend lower and be a bit slow to take profits. However, there will be a time when you need to take profits. Below are some examples of how you can take profits off the table.

  • Take profits when the stock trades decisively above the declining 50 MA
  • Take profits when the stock starts to make a higher high and higher low (sign of uptrend starting)
  • Take profits when a bottoming chart pattern starts to form
  • Take profits when the stock hits a major support
  • Take 1/2 of your profits off the table as time goes by
  • Once you have a substantial reward, I recommend that you put your stop loss to breakeven

If you don't really understand the above, its alright. I recommend that you take advantage of this website and start the free Trading Course form start to finish. Then you will be able to spot when is a good time to take profits. It takes some knowledge and skill to be able to capture a big chunk of the profits.

Sometimes, when you have made quite a lot of money on the stock, it is not a bad idea to take 1/2 profits off the table. If you risk $2000 and your are making $4000, you can just cover 1/3 or 1/2 of the position and book your profits. You still have the other half to ride the trend lower.

The last recommendation I mention about putting your stop loss to "breakeven" is a trade management strategy that will ensure you protect your profits. Let's say you risk $2000 on the trade and after riding the trend down, you realize your profits are close to $4000. At this time, it is a good idea to put your stop loss at breakeven which is your original shorting price. That way you will have a free trade.

I think the articles How To Spot A Bottom In Stocks and How To Spot When A Stock Is About To Begin An Uptrend from my Trading Course will also help you to know better when to take profits off the table. If you have time, do check them out.

Bonus Example

Let me just give you another example to solidify your understanding of this chart pattern and trading strategy. The more examples you see, the more things you will learn. You will also be able to see the subtle differences and be flexible when it comes to this trading strategy.

the bearish consolidation at 20 MA is a great trend following trading strategy

The chart above is the daily chart of TCAP.

I want you to go through all the 4 criteria yourself and see if the stock satisfies them. I think you will realize that this stock is a perfect candidate for the bearish consolidation at 20 MA trading strategy.

There are 2 bearish consolidation at 20 MA in this stock. The first breakdown is around June 2017 and the second one is around late July 2017. The first one is the more common one that you have seen in the other examples above. The second one is still a bearish consolidation at 20 MA pattern but with a slight variation.

Instead of breaking down, the stock actually gapped down from the consolidation. Does this make any difference? Well, it won't affect the pattern's validity but the fact that it gaps down increases the bearishness of the stock.

Stocks gap down for one reason. When things are very bearish they gap down.

Which explains why the drop is significantly faster and steeper than the normal breakdowns that you see. This is good for those who short the stock as it enables the trader to make profits faster.

Look how much the stock has fallen after the first bearish consolidation at 20 MA pattern appeared. From around $18.00, the stock fell to about $13.00.

Conclusion

I hope this article has open your eyes a bit more to the world of stock chart patterns and the world of stock trading. This pattern does not only appear in stocks, in fact you will see them in indices, forex and even commodities. Chart patterns are universal and wherever there are humans that trade an instrument, chart patterns will repeat itself again and again. Learn this trading strategy well and you will be able to profit from a stock that is in a downtrend.

Charts with the Freestockcharts.com label are courtesy of Freestockcharts.com

Charts with the investing.com logo are courtesy of Investing.com powered by Trading View

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