From False Breaks …

May 13, 2019 Off By Chuck

One of the first adage’s I learned from one of my TA mentors was “from false breaks come big moves”. It’s supposed to be a catchy phrase about the potential for big moves in the opposite direction when price breaks out of an area of previous resistance (which now becomes support), moves higher and then reverses back below that prior resistance / (what has now become) support line.  A good example of this occurred in US stocks last year as depicted in the SP500 index chart below.

As you can see price broke eventually above the blue horizontal prior high level. Moved higher for a few weeks then reversed course and fell back below the prior breakout level. What came next, we all know, was our ~20% decline in stock prices that ended on Christmas eve last year.

san ramon best napfa fee only financial advisor 5-13-19 1 SPY.png

 With the TrumpTrade volatility dominating the markets of late, it is interesting to see the SP500 has fully recovered and moved back above last Sep 2018’s high (see below). But what is more interesting is to note the SP500’s price ended last week right back on the breakout level. If further volatility is ahead, it could be expected we see the SP500, once again have a second failed breakout.

Bay area best napfa fee only financial advisor 5-13-19 2 SPY.png

Of course nothing works 100% of the time, but the “from false breakouts” adage should still be front and center with investors at this time in case the markets want to repeat last year’s false breakout sharp decline.