As the Cycle Of Price Action declines off its highs, the 10 and 20-day exponential moving averages continue to act as resistance against any upward momentum and guide the stock lower.

The EMA Crossback, to the downside, is the first retest of the moving averages after the Wedge Drop confirms the downtrend. The downside price movements will occur more quickly, but the same principles apply when comparing the EMA Crossback to the upside.

After the Wedge Drop, the price will rally into the declining moving averages and briefly pause. More selling pressure will emerge pushing the stock lower.

The EMA Crossback is a mechanism used to watch the stock trend between the Wedge Drop and Reversal Extension in strong trending bull markets, but can also offer an opportunity to short stocks in weaker bear market conditions.

Avoid The Downtrend

Downtrends are volatile, and ideally, any long positions have been closed at the Wedge Drop. When the 10-day exponential moving average is below the 20-day, there is no reason to be long the stock.

When the price is below the moving averages, pay close attention to the stock as it responds to any strength. Focus on the price levels it finds support and resistance at while it consolidates the recent decline.

Be patient during the downtrend in the Cycle Of Price Action. Trust the system as it favors bullish conditions and wait for an ideal price consolidation to emerge.

In more severe market conditions the EMA Crossback to the downside can be used as an opportunity to short the stock. Be aware, however, that downtrends are more volatile compared to uptrends.

Volatility In Downtrends

When stocks experience selling pressure in downtrends they will move more quickly than stocks under accumulation in uptrends. Oliver Kell notes the adage “stocks take the stairs up and the elevator down,” and stays in cash when the market is selling off and uses this time screening for relative strength.

Uptrends often develop gradually over months, as investors’ confidence builds up over time and demand for the stock increases. When a downtrend begins to develop, fear sets in accelerating the price lower.

In addition to selling pressure, traders will become unwilling to buy new positions. The lack of liquidity will drive the price even lower.

Remember the best trades start as they emerge out of a tight consolidation pattern.

For long-biased traders, Be patient and wait for the leaders to emerge after they form a Reversal Extension and provide an ideal trading range through a Wedge Pop.

Declining Moving Averages Resist The Price

At this point, you will see the moving averages resisting the price as the downtrend continues.

The price will make new lows, rally up into the declining moving averages, briefly consolidate, and then roll back over. As the moving averages decline, watch for weakness to pull the price through recent lows and continue downward.

The EMA Crossback to the downside will be more volatile and move more quickly than compared to the uptrend.

Continue watching leading stocks and screening for strength. Eventually, the cycle will unfold and a Reversal Extension will form reversing the trend.

Shorting In Bear Markets

Be sure to understand all the risks involved with shorting stocks and limit shorting to confirmed downtrends. Unlike buying a stock on the long side, when you short a stock the loss is theoretically limitless.

Maintain discretion to short stocks only when there is a high conviction that the stock or the market will roll over.

The EMA Crossback provides an opportunity to add to a short position initiated at the Wedge Drop and a clear area to set a stop against. When the price rallies into the moving averages, short the stock with a stop placed above the high.

Don’t blindly short a stock as it is rising into the moving averages – Watch the price levels.

Control your risk by looking for a tight consolidation pivot. Enter the short position when weakness drags the price through the pivot and place the stop above the moving averages.

Be careful not to short too late in the downtrend, just like buying late in an uptrend. Use the Cycle Of Price Action to understand how far along we are in the current trend.

Examples

NVDA topped after a 120% move out of a traditional base breakout. The first exhaustion Extension emerged on the largest price gain and highest volume of the run to signal the top. A Wedge Drop occurred when the price retested the highs. Once NVDA lost the moving averages, they acted as resistance at the EMA Crossback.

LULU advanced an impressive 125% after it gapped out of a base in 2017. After a Wedge Drop followed an Exhaustion gap in 2018, the moving averages acted as resistance as it formed a new base. Study the bases LULU formed and look for the weakness that developed at the EMA Crossback confirming the Wedge Drop.

Shopify had an impressive 150% run after a traditional base breakout that ended with a Wedge Drop just to form another tradable base. The first retest of the moving averages at the EMA Crossback confirmed more time is needed for a new base to develop.

Putting It Together

The EMA Crossback, on the downside, further confirms the downtrend after the Wedge Drop as the price retests the declining moving averages for the first time.

Downtrends are more volatile than uptrends. Ideally, any long positions had already been sold before resistance sets in at the moving averages.

The Cycle Of Price Action progresses more quickly to the downside compared to the upside. What took months to accumulate can take days to sell off.

Stay in cash and let the cycle unfold when you recognize the moving averages act as resistance at the EMA Crossback.