False Breakouts, How To Predict Them?

[mo money]

A pattern failure of a false breakout usually leads to a quick reversal. I would like to learn how I can predict a false breakout from a real one before the move happens.

It appears that professionals usually get in before a breakout and would short new highs. How are they able to do this?

[jorge]

Just play the breakout. If it drops below the former resistance level, reverse and go short.

[mo money]

Is there no way to anticipate breakouts or false breakouts?

The broker dealer and financial sectors tend to lead the markets. Would looking at these sectors help anticipate a move in either direction? For example, if a stock is consolidating in a tight range and the broker dealer index breaks a key resistance, would this indicate this stock to breakout of the range?

[carter]

	Quote:	mo money
	Is there no way to anticipate breakouts or false breakouts? The broker dealer and financial sectors tend to lead the markets. Would looking at these sectors help anticipate a move in either direction? For example, if a stock is consolidating in a tight range and the broker dealer index breaks a key resistance, would this indicate this stock to breakout of the range?

Yes, they should be able to give you a heads up as they are leading sectors. I assume you are trading stocks. Perhaps you should take note of this and observe to see if it works? Also, I do think it depends on the stock you are trading. If you are trading a stock that moves inversley with the financial sector than it will probably not budge.

[Soultrader]

I tend to use market internals to anticipate breakouts. One method I use is new TICK/TRIN highs or lows. You can also use the PREM to spot any buy/sell programs at key price levels.

For methods to anticipate a pattern failure, if a key level of resistance is above a range I usually short at this level. For example is the YM is stuck in a range from 11770 to 11790 and 11800 is a key level of resistance, I will usually fade this level aiming for a breakout failure. I noticed that key price levels take several attempts to break. Usually the first attempt is a good fading opportunity.

[mo money]

Thanks for the insights. How about technical pattern failures? I have noticed that they tend to occur alot.

[Follow The Trend]

I tend to keep a close eye on trade volumes, as there needs to be a big push to breakout, and if there is no volume behind it, will it stick?

Sometimes a "false" breakout can be the first part of a proper breakout. I have seen many situations where stocks have hit highs then drifted back, but after a little consolidation, they have had another go at the breakout point, and passed through.

There is no real set pattern , and it probably comes down to gut feeling and experience.

[Trade Up]

As we are looking for changing trends we will often come across false breakouts.

While I would never normally rush in on an initial breakout, I take a lot of notice of trading volumes. This is perhaps more useful when shares are falling, and we are looking for that last big sell-off before the shares bottom out.

Next time you see a share turning after a downwad spiral, check the volume just before the turn, and chances are you will see the last leg of the sell off, on high volume.