Henrik EkenbergThe Breakout Fails: Symptoms and Causes (Thread) 🧵
A breakout can fail when a stock triggers a sell signal, commonly a 7%-8% drop from the buy point. Let’s break down the key symptoms of a failed breakout and how to spot them before it’s too late 👇
Volume is too low 📉
Successful breakouts require strong volume. Volume needs to rise at least 40% above the stock’s average on the breakout day or shortly afterward. This shows institutional investors are backing the move. If volume doesn’t surge, it’s a red flag 🚩.
Also, check the stock’s weekly chart for confirmation.
The base was flawed to begin with 🚫
A bad base usually results in a failed breakout. Watch for bases that are too short (less than 7 weeks), too deep (more than 35%), or too volatile.
If the base forms mostly below the 50-day moving average, it's a weak setup. Don’t expect a bad base to produce a good breakout.
Late-stage bases 🔄
First- and second-stage bases usually lead to the best gains. Third-stage bases are more hit or miss. Fourth-stage bases? 🛑 They tend to fail more often than not.
As a stock matures, investor enthusiasm cools off. Be cautious with stocks forming bases later in their run.
Straight up from the bottom 📈
If a stock rockets straight from the bottom of the base to new highs within 1-2 weeks, be wary ⚠️. While it may seem bullish, these rapid blasts often fail to hold up.
A more measured advance is preferable for a stable breakout.
The stock market is weak 🛑
This is the #1 reason breakouts fail. Remember, around 3 out of 4 stocks follow the broader market. Even the best breakouts can flop in a weak market environment.
Keep a close eye on market conditions before entering any breakout trade.
That’s it! To sum it up: Breakouts fail for many reasons—low volume, flawed bases, late-stage patterns, rapid price moves, and weak markets.
Be patient, analyze the signs, and you’ll avoid most failed breakouts 💪.
Happy trading!
#StockMarket #Breakouts #MarketAnalysis #Investing #TechnicalAnalysis #TraderTips
The Breakout Fails: Symptoms and Causes
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