Using Butterflies to Short Stocks

Market Volatility

Market volatility has picked up, meaning there are more downside opportunities than before. When the market starts pulling back, I always try to quantify if it’s a normal “buy the dip” opportunity or if it’s a little bit deeper of a move that means it’s time to short some stocks.

Identifying Bearish Alignment

Looking for stocks to short will always start with analyzing the indexes first and then critical sectors. If both are in alignment to the downside, and there has been a major pattern shift, like:

  • A break of the low of the high bar on the weekly or daily chart
  • A break in symmetry
  • A break below the 34 EMA or the 50 SMA on the daily chart
  • The TrendStrength Turbo candles shifting from green to bright red

These factors are apparently on this daily chart of the Nasdaq futures below:

In this case, the Nasdaq didn’t merely pullback to the 50 SMA (the yellow line) and bounce, but it pulled back and broke through this level on high volume. This led to a shift in trend, one that is tradeable to the downside.

Shorting Stocks

When this occurs, it means it’s time to look for some short opportunities. This is especially true when you can identify a ticker itself is in a bearish trend and has an additional catalyst coming up, such as earnings. It definitely helps if the ticker is likely to move with the index and/or sector. It’s always easiest to follow along with the path of least resistance!

All of these factors paved the way for a bearish trade in Tesla. Check out the screenshot below:

Tesla has been in a bearish trend since it shifted patterns and has regularly come up to resistance, which provides opportunity to enter the ticker at a spot where you have an edge.

I believe the best way to do this (which is because it’s my favorite strategy!) is with butterflies. Check out my video with my butterfly spread video below.

Trade Review: TSLA

If you want to learn more, check out my Trade Review video in TSLA below:

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