37. Bearish Setup - Weak Structure Short (WSS)
[1. Setup Mastery] - [1.4 Bearish Setup] - [1.4.3 Weak Structure Short (WSS)]
Weak structure short is a continuation setup. Anything in the market, Continuation setup has an inherit edge.
The stock should have continuous three down days, It should be continuous three red days and that fall should be more than 10%. And it should not have more than 3 consolidation days and none of them should be of 2.5%, Not even 2.5%but ideal it should be 2% and then it starts going down and creates a negative bar then short that stock.
What you are finding is a stock which should have continued selling and it pauses and its pauses for maximum 3 days.
Best weak structure short is something that pauses for one day. 2nd Best things which pause for 2 days and 3rd best thing is which pause for 3 days.
Where to find these stocks? It's in a combo bearish scanner. Again this is a visual pattern and visually you can find it.
NIAGRA310weak32.5% - Stock should fall continuously for 3 days like Niagara falls, Waterfall action. Which should be down 10% and it should not have more than 3 days of consolidation and none above 2.5%.
Once you find that stock and it has to have a negative bar, Near the close that is last 10 mins before market close then short it.
This works because when funds decide to liquidate their position they come every day and short it or there is some stock they want to get rid off then they don't care hence they just sell it.
Stops are usually half of the day or less than that.
True market leader before and stock made WSS is the best stock to short. Here sellers are in control and the first leg should be 10% if it's 5-6 % then it should be a high priced stock like 10$ plus fall then 2nd leg will be similar to 1st leg.
Now the difference between 2lynch and WSS is the probability of finding 20% plus is low and profit potential in this setup is 8 to 10% because stop is less than 2.5% even 8 to 10% is good RR.
This works in the bull market also because for whatever reason some stocks keep going down. Because something has gone wrong and that particular stock for whatever reason market decided to liquidate that stock. Very high probability setup and we can achieve a high win rate if done right.
Again, find this as soon as possible. In the 1st leg which is best, one or 2 legs is good enough and on the 3rd and 4th leg you will get into trouble. Always look for this as it's important.
This also works amazingly well on an intraday time frame because if stock decides to go down it will just go down.
The best ones are ones that don’t even bounce on intraday because sellers are so persistent they just want to sell for whatever reason. They don’t care and just want to get out of the stock.
Institutions are the ones creating WSS as a pattern that is mutual funds and hedge funds etc.
Can we anticipate WSS? Answer is yes. And it works on all price levels but the best ones are the ones which were strong earlier. And whenever the stock is darling of the market and its going down then disappointment is more.
And remember to take profit after 3 days, don't overstay it can bite us. And damn this is an extremely good setup for day traders.
Nuance - Entry day candle, Close should be near low of the day and avoid those stocks that have big down wick therefore showing rejection.