Monday, December 26, 2011

Overshoots, breakouts and failures…welcome to the market

Here we are again with everyone trying to call and trade breakouts. Well I have news for you, breakout trading has been a relative disaster this year…most every breakout triggers just far enough to get everyone on board and then immediately aims for their stops…usually on the opposite side of the breakout where they stop & reverse to go the opposite direction to play the whole thing all over again. In fact, as a general rule, MOST breakouts become failures no matter what the market.

The strange thing is that though this is the case for most breakouts and though trendlines must be continuously redrawn people continue to try to trade them.  Breakout targets if trendlines are not redrawn are at 1.128 or 1.272 extensions before a reversal. This is likely again the trap that is setting up for many of the indices right now. And again, it reflects a real effect…the majority of losses do not come from people being wrong on trades but reversing and reversing and finally reversing again.

I will point you to my chart of the Utilities once again for a live example of one of these events in progress…you will hear CNBC and all the people who can promote it sharing the breakout status on a few indexes…the key is not to get trapped in the reversal of the breakout when it turns into a failure…the Utilties have overshot though ideally could move just a little bit higher (though this is not necessary) before it entangles its victims.

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