The Failed Breakout

The Failed breakout is one of the most important concepts for traders to understand, particularly in the current market environment which is characterized by a strong overall uptrend along with many stocks hitting new 52-week highs. $REXX came to my attention on Monday after the market close and I immediately put the name on my radar as a long setup with a great deal of potential – Tuesday I traded it very nicely from the long side and the stock closed above a key level and appeared poised for additional follow through:

Click to enlarge

Not only is the above chart full of potential, REXX is a heavily shorted name with a short interest of 19.39% – this makes for a juicy long setup particularly in the context of a healthy overall market environment in which short squeezes have been quite common. While this all seems very exciting one must remain mindful of the potential for a failed breakout which can cause rapid and powerful reversals. Remember: “From failed moves come fast moves” The probability of a failed breakout was higher with REXX due to the fact that the stock has been mired in a long term downtrend and had a downward sloping 50-day SMA and a flat 200-day SMA. Let’s see what ended up happening:


A failed breakout followed by a nasty reversal lower – I gave back some of Tuesday’s REXX profits getting caught in the first part of Wednesday’s reversal but as is usually the case, the first loss was the best loss. Let’s take a closer look at a 10-minute chart for clues which helped to signal the breakout was failing:


Notice the large amount of volume which changed hands between 11.70-11.90, once price surged past 12.00 it was extremely important that 11.90 was supported and that the 11.70 level was not breached. Once 11.70 was decisively breached the sellers were in full control and never let the bulls up for air. In a market environment laden with algos and HFT bots that prey on human psychology and textbook chart patterns, it is crucial to study both the price & volume behavior of successful breakouts and failed breakouts alike.

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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