breakout

Originally Posted by karthikmarar

Hi Anu and Saint

Thanks a lot. Learning and sharing…that’s what makes this forum unique.

Regards

karthik

Originally Posted by srisara

Hey, (AMIT, Karthik)
Thanks to all for your excellent write-up..Satya

Originally Posted by karthikmarar

The price dropping and remaining below the support line itself is considered a false breakout. There is no "how much below". It may even go down to the next support line. Also volume is not a consideration, the drop may be on small volumes.( I have noticed that normally volume decreases)

I am enclosing the chart of Alok Textile showing a false breakout in September 2004. Please note that it is not an ideal example. But this is the only one I could get hold of now. It does present some idea of a false breakout.

Normally in a break out after the penetration of the resistance line, the traders are reluctant to accept the new higher price level and there will be selling pressure. The price will then return to earlier resistance / present support level. This is called the TRADERS REMORSE. The action of the price after the Trader’s Remorse is very crucial. The price may rise to higher level from the support line signaling the breakout. If the general feeling is still that the new price is not warranted then selling persists and price goes down further. This results in a Bull trap (refer Saint's post) or False breakouts.

Iam enclosing the Chart of Alok Textile showing the recent breakout. The Traders Remorse is quite visible in this.

Thus it may be a better idea to enter the stock after the upturn from the pullback (trader remorse ). see chart.

Hope I was able to clarify your doubt.

reagrds

karthik

Originally Posted by AJAY

Hi Karthikmarar,
first of all let me congratulate you on your sense of analysis and for the passion what you have on TA.you are very good at TA. And also as you said the example what you have taken is not that right on a broader sense.
Basically the breakout is said to be failed if the asset price enters back into the congestion zone by 50% of the congestion range.
But the so called sharks who know this, they hammer the stock and take it back. There yoiu will find bulltrap and beartrap as well. Right now I can't write more than this. But one example for this happened in ALPS INDS. You pl.check the charts from last november till date. I am attaching it here. Firstly there was an upward breakout. Then it went back into congestion. Then the fall with gap for exits. Then one more rally followed by a correction. But the operator took care in such a way that the stock didn't cut the pr. bottom.pl. observe volume behavior. It itself will be the clue.
In this stock, trade continuation can be discussed. The operator can fool the traders only once or twice. Then the move will be in its direction. But getting stopped in the stock should not put us to distress. We should continue the trades. REMEMBER the number of times the operator tries to get the traders out, the bigger will be the move. On every trap he will lose money. And on the real move he will collect back all his losses and make all big money.

The very idea of the operator to run stops is to get the people out of the game in his security to avoid the noise.If noise is not there, he can happyly run the circular trades in that and make the price moves in his direction.

I am unable to attach the file for its size, Karthikmarar you pl.take care of it.
AJAY

Originally Posted by AMITBE

Hi cmlee, Karthik, Ajay and Murali...
Below I am adding a supplement to the issue of breakouts and false breakouts. This is from my research and notes of the past. It's always difficult to remember everything one has read, so this was a good opportunity for me to open some books again! Thanks!

Breakouts almost always occur at points of discord and divergence: levels of support and resistance. On either side of these levels, a lot of price action is generated, but no one is quite sure just how much force is required to carry price into a sustainable trend. Any position one takes near a breakout level comes with a fair deal of risk, regardless of how perfect a pattern may appear.
Price action responds in different ways to a breakout. First, it may carry through successfully to higher levels. Second, it may generate whipsaws (volatile and choppy price swings through support or resistance levels), resulting in losses on both sides of the market. Third, it may trap buyers in a false move and start a trend in the opposite direction.
It is believed by some technical analysts that a successful breakout occurs in three phases.
It begins when price breaks through resistance on increased volume. This is called the Action Phase. Price increases by a few points, and then reverses as soon as buying interest fades.
From here begins the Reaction Phase. The market will sell off, and propagate the first pullback, where fresh buyers see a chance to get in close to the breakout price. If everything goes well, a second rally kicks in and raises the price above the initial breakout high.
This marks the Resolution Phase where the price creates new highs.
For the three phases of a breakout to succeed, much depends on certain volume action:
Demand must exceed supply during the initial breakout. Volume should drop sharply during the pullback of the Reaction Phase. And finally, fresh buyers should come in to successfully trigger the Resolution Phase.

A false breakouts occurs when these forces fall out of balance.
Whipsaws will prevail when a breakout can't generate an efficient reaction phase. This failure need not necessarily trigger any major reversal, though the pullback will purge out weak hands and push the price back into resistance.

If there is a good number of buyers in the scrip throughout the choppy price action, they will repeatedly support the price, and as soon as the whipsaw fades out, the price stablises resulting in a loss of volatility.
A voluminous sideways movement in a tight price-band will then come into play, which itself acts as a trigger for a buy signal for the experienced traders. This would then start a bounce up in price to carry it beyond the last high.

Mainly then, once the first lot of buyers enter at the initial breakout point, much depends on the behaviour of the successive hoards of buyers.
A false breakout occurs when this second crowd fails to appear for any reason, whether it’s a failure to spot the breakout, or a disagreement with the price pattern. Without the support of fresh buyers, the scrip gets stranded in an overbought zone and falls from its own weight.
To extend this further, every new low will trigger s/l points, building momentum to the down, drawing with it new short-sell traders as more key supports are broken. Here a sharp reversal is now under way.

Hope this will add to the wider understanding of the subject...
Regards.

Originally Posted by avinash

So many excellent articles in one thread.....thx Amit.Your knowledge and understanding is so deep.Thx for sharing with all of us,especially newbies like me are benefitted.Thx!

Originally Posted by avinash

Thx for making it so simple.......thx again,Saint!