Master Trader Breakdown – Learn Why this Setup is a No-Brainer!
Master Trader Breakdown: Breakouts and Breakdowns are great setups as Igniting or Continuation trades in trending markets. But many fail without the proper clues or, using the poker analogy, of “Tells.” Master Trader teaches how to buy/short the initial Breakout/Breakdown, as well as retracements and reversals to Support/Resistance, and continuation patterns. With all Breakouts and other bullish setups, we need a Price Void (i.e., insignificant resistance to the left) to allow the issue to move higher (opposite for shorts).
Real Master Trader Trade with iQIYI Inc. (IQ).
Initial Setup: IQ was a bearish igniting Gap Breakdown on earnings where we shorted. Because we generally don’t recommend swing shorting stocks under $5.00, this was a perfect Gap Breakdown trade we recommended to traders in our Green Trading Room
The first blue arrow shows the Gap Breakdown entry. Notice on the 15-Min. chart that IQ was unable to retrace/bounce at all after the opening print. This was a sign of weakness, so we recommended shorting a 1-Min. low with stop over the prior day’s high.
Bearish Signals: Notice all declining moving averages that we use on all daily charts (20-, 50- and 200-MA). In downtrends, we look for bearish setups until the trend ends or it gets climactic.
The declining and parallel 20- and 50-MA, which we refer to as “railroad tracks” because of the decline and relatively parallel space between them, is a visual aid of weakness and institutional selling. Notice two days’ of igniting bearish Volume, confirming the dumping.
So now we just need a bearish setup! From mid-July to mid-August, notice the bearish consolidation, unable to retrace significantly higher (and never trading through the 50- or 200-MAs), with bullish candles being ignored – all signs of bearish price action. Also, 8/19 was a Breakout Failure, retracing back to Major Support.
Under these lows, IQ has no place to go in the short-term except down!
IQ had earnings on the day it gapped down and we recommended shorting at least as a day trade.
Multiple Time Frame (MTF) Alignment: Although not shown, the weekly and monthly timeframes were also in downtrends (and the 15-Min. chart obviously was also as shown).
Trade Execution and Additional Analysis
On the -Gap Breakdown, notice the first 15-Min. bearish Wide Range Bar (-WRB). It was unable to bounce at all into the gap which is bearish.
We gave the green light to enter short per your Trading Plan which, in this case, based on the above, was a 1-Min. low with protective stop over the prior day’s high.
IQ fell rapidly for 5 bars, getting short-term climactic. It makes perfect sense to close some into weakness and then manage the remainder again using your own Trading Plan.
For the remainder of day, IQ consolidated in the bottom 1/3 of the morning’s rapid advance lower – bearish!
That turned out to be a bearish consolidation as the next trading day the opening 15-Min. candle was another -WRB crashing lower into the Void! Again, with such a huge, quick unrealized gain, the remainder should be managed using your own Trading Plan.
Regardless, if you were to hold some based on a swing trade, it still made sense to cover another 1/3 into the close the second day as it extended farther away from the 20-MA on the daily chart.
Profit: It was an amazing setup with easy management. We don’t recommend any share size for traders but assuming a max loss of $300/trade, you would have shorted 2000 shares ($300 divided by ($3.13 Stop Loss less $2.97 entry)).
Shorting 2000 shares would have yielding a generous $1,260 profit (21% return) in two days.
Conclusion
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