ARIA: Reversals And Confirmations

ARIA put in a Bearish Engulfing pattern on Thursday at the top of a "possible" Bear Flag, so "possibly" a sign of some kind of top. In a situation like this, some players will go ahead and short it with a stop of either a PRINT above the high, or a CLOSE above the high. Either of those is fine for a short, if anyone wants to do it. It's a low risk entry unless the stock has a big gap up, but that risk exists when shorting ANY stock.

Some players will wait for further confirmation, like a break of the putative Bear Flag, or even a break of the Bear Flag, then a failed retest for additional confirmation that the chances are very good that some kind of top is in, an example of which we'll look at in a moment.

The December 2 candle pattern at Blue #2 in the Channel was a Bearish Engulfing pattern, similar to the one on Thursday, January 26. That one turned out to be a short-term top. The high was 12.50 and the stock sold off to 10.41.

Now look at the September 21 top, at 10.71. That one had several confirmations of a short-term top:

1. The stock had broken out of an Ascending Triangle to the upside, but September 21 was a Reversal candlestick. It made a new high for the move, then closed back inside the pattern AND closed below the prior session's low, closing at 9.97. That's nice initial confirmation. For a short trade, use a PRINT or a CLOSE (trader's choice) above the 10.71 high as the stop loss.

2. ARIA bounced off the bottom of the pattern and rallied back to the top of the Ascending Triangle and, although The Bulls managed to poke their heads through it by a tad, The Bears did their job and knocked it out of there by the close, still inside the pattern (red arrow).

3. Two sessions later, The Bears broke the bottom of the Ascending Triangle AND took out the recent 9.27 low (green arrow). More confirmations.

4. The next session, The Bears only allowed The Bulls to get to 9.30, a hair above the 9.27 horizontal resistance, then took it down. That was confirmation of a failed retest of former support, which now was resistance as it "should be."

The final low for that move off the 10.71 high was 7.72, just about half way between the last two lowa of the Ascending Triangle (8.13 and 7.55). That's about what one would expect on a broken pattern like that. Some kind of retest of the low, but a stock doesn't always go all-ll the way back.

The next session was a Bullish Key Reversal: a new low for the move, then a close higher than the prior session. That two-day reversal pattern suggested that Bears had jolly well had it as far as taking the stock down. Bears who didn't cover their shorts on that reversal got squeezed to the upside. Badly.



In March of last year, ARIA had enjoyed a big percentage gain and had put in an ominous looking Gravestone Doji Star Hangman AND a possible Double Top at 7.32... 7.30. The Bears felt that it was a reversal candle and that it was a great shorting opportunity, and sometimes they are...



...but, it wasn't. The shorts got squeezed some more, into ANOTHER Gravestone Doji Hangman. That gave The Bears hope that maybe their misery finally was over.

You know what's coming, don't you? LOL.



UGH. That wasn't a top either. The top didn't come in until the stubborn Bears nearly were squeezed half to death, and that has much to do with the nature of parabolic rallies. The shorts won't let it alone and, at least in part, margin calls force them to capitualte and "Buy To Cover" forcing the stock higher and higher until some of them are knocked out of the game entirely.

"Know when to fold 'em!"

Shorting a "possible" reversal candle, or "possible" reversal pattern (like a two-day Bearish Engulfing pattern) is perfectly alright and sometimes we get rewarded for doing it, but if the high gets taken out, as in these examples, admit as quickly as possible that our thesis for shorting is blown, take the small hit, and don't allow a trade to turn into a horrible disaster like this. DOUBLE UGH.

As is usually the case with parabolic rallies...



... they don't end well. ARIA finally topped out and had a Parabolic Return to the origin of the rally, and slightly below it, which often is what occurs. There's no base-building on the way up and the plunge often is equally dramatic on the downside. Greedy Bulls who don't take profits watch their stellar gains evaporate. We looked last week at a much more stunning example of that in AK Steel (AKS), if anyone wants to scroll back and review it. The stock had a Parabolic Return from $73 to $5.



In Friday's session, The ARIA Bulls came roaring back and took out Thursday's 15.15 high of the Bearish Engulfing pattern, but closed at 14.96, so Bears using a PRINT above Thursday's high were stopped out of their shorts. Bears using a CLOSE above Thursday's 15.15 high still are okay in their short position, but Friday's action certainly wasn't what they wanted to see.