Stocks Break Out, But Is It the Real Thing?

Over the last week, we’ve covered three trading terms: “resistance,” “support,” and “trendlines.”

By way of review:

  1. Resistance is a particular price level that stocks struggle to break above. From a supply and demand perspective, resistance represents a level at which buying demand struggles to overcome selling pressure. As a result, this level acts as “resistance” to a rally.
  1. Support represents a line at which stocks refuse to break lower. From a supply and demand perspective, support is where buyers come into the market to absorb selling pressure. This is what stops the markets from breaking down further.
  1. Trendlines are diagonal lines formed by a series of moves that end at lower or higher levels. These lines help determine trends, and when combined with support and resistance, can allow you to make note of major changes in the markets.

Our timing on these topics could not have been better.

The market showed us the significance of both resistance (red line below) and support (green line) several times last week. And as I write this Monday morning before the market opens, stocks have just broken out above resistance.

resistance

This represents a new trading term we’ve yet to cover: “the breakout.”

Stocks Stage a Breakout

Breakouts occur when an asset breaks above or below a particular line of importance (resistance or support). We are seeing one occurring in the stock market this morning – stocks are breaking out above the resistance line we’ve been tracking for the last week.

There are two types of breakouts: confirmed and false.

A confirmed breakout occurs when an asset breaks above or below a line of significance and is able to stay there. When this happens, it signals that the market has made a significant change. One of the hallmarks of a confirmed breakout is that the line in question changes in nature.

For instance, if the line was a line of resistance, a confirmed breakout will feature that line becoming a form of support. Meaning the very line the market had a difficult time breaking above is now holding the market, or supporting it.

I’m talking about a move that would look like this:

a confirmed breakout

By way of contrast, a false breakout occurs when an asset breaks above or below a line of significance and is UNABLE to stay there. When this happens, the asset typically reverses hard and then moves violently in the opposite direction.

I’m talking about a move that would look like this:

a false breakout

For this reason, a lot of professional traders I know refuse to buy breakouts.

Instead, they wait to see if the breakout is confirmed or false. Doing this ensures that they only trade setups that have a high probability of success.

As I wrote earlier in this piece, stocks are staging a breakout this morning. Will it be a confirmed breakout or a false breakout? I don’t know. No one does. But the pros I know won’t be trading much until they know the answer.

I suggest you do the same.

Best Regards,

Graham Summers
Editor, Money & Crisis

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Graham Summers

Editor Graham Summers has spent the last 15 years building a reputation as one of the most sought after and highly respected investment strategists on the planet. His work has been read and quoted by former Presidential advisors, award-winning institutional analysts, U.S. Senators, and more. He’s one of the few analysts on the planet to...

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