When Failure is Good

When Failure is Good

August 28, 2018 Off By Chuck

There are few things as short term bullish than a failed breakdown at a level of major support. The breakdown has short sellers jumping in to take advantage of a continuation of downside action. A reversal (breakdown failure) and move back above support/resistance creates upside fuel as the short sellers are forced to cover, pushing the stock higher. Depending upon the amount of shares shorted, the ongoing cover could move the stock much higher, as momentum players will eventually add more fuel as they jump on board the train higher. The thing to remember and watch is that dynamics of movement around support and resistance can lead to big moves … in both directions

GE, a company I have lost any interest investing in, after falling more than 60% in 2 years may have found a (temporary) bottom, setting up for a reversion to the mean trade.  As you can see in the chart below, GE’s price tested the $12.75 level at least 5 times before it finally failed mid-August and began another push lower.

As can be the case with breakdowns, price stays below support for a couple of days and reverses. GE declined 3 days, printed a hammer reversal candle and has subsequently moved higher. Yesterday it closed right on the critical support/resistance zone. A move and hold higher points to potentially much higher prices. The first target being T1 and ultimately the possibility of retesting prior 2017 highs which would provide an almost double (100% return).

Before we get lost in our dreams of a first-class trip around the world paid for with the windfall profits from a GE failed breakdown, it’s always important to frame the risks. That $12.75 area is key. A move and hold above (preferably on increased volume) is a signal to be long while a revisit and hold below, tells us to move on and put the first-class trip on hold.