Corey Rosenbloom: We have one more educational lesson to add to our previous “Lessons from Three Bull Traps and Reversal Pathways” post – Crude Oil similarly triggered an initial breakout with divergences then returned back under the breakout trendline, signaling a potential collapse toward the lower support line.
Let’s take a look at this development and add it to the list of “Failed Breakouts and Bigger Moves in the Opposite Direction.”
Cutting straight to the point, the $98 level was an upper resistance target that corresponded with the January 2013 high along with the falling trendline into $97 per barrel.
Price not only broke above the $97 trendline level but then above $98 to print a new high for the year.
Unfortunately, the breakout was short-lived and the alternate “collapse” scenario triggered on the return back under the $98 then $97 level as seen on the intraday chart below:
It’s vitally important to assess the intraday chart for signs of confirmation (meaning strength in indicators and volume) or non-confirmation (weakness or divergences) to assess the odds of the breakout succeeding (triggering bullish positions) or else failing (triggering stop-losses all the way down).
As we learned from the prior “Bull Trap” post, a breakout that fails tends to lead to a larger than expected – suddenly violent – move in the opposite direction as traders are trapped (forced to liquidate) and short-sellers are pressing their advantage on the failure.
In terms of game-planning, we can never know whether a breakout will succeed or fail but we can plan an alternate trading strategy in the event that we do see a breakout event fail in real time.
If we positioned (got long) into the breakout above $97 or $98 in this case, we had to take a sudden yet small stop-loss to prevent the position from morphing suddenly into a large loss which is often the case on a failed breakout (don’t freeze with “Deer in the Headlights” syndrome).
Even if we took a stop loss or even if we didn’t position into the breakout at all, savvy or aggressive traders can turn a Bull Trap or Failed Breakout strongly to their advantage by playing the failure (alternate) outcome which usually develops as a violent collapse in price straight down toward – and sometimes beneath – a prior trendline or price support level.
Each trade and each set-up like this that we study provides insights for learning how to adapt in real time to ’surprise’ events and ultimately makes us better traders for learning real-world lessons like these.
This article is brought to you courtesy of Corey Rosenbloom from Afraid to Trade.