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More often than not traders wait for the stock to breakout or, in other words, move out of its current trend before buying. Technical analysis allows us the opportunity to spot where these possible breakout points are and to execute accordingly. While that is all good, the true value of technical analysis is that it prevents us from executing losing trades.
We can find all the setups we want, and not execute a trade unless the stock meets our criteria. Many times stock charts have the perfect setups, but then don’t play out. Once again, proper technical analysis will help us determine when we should take part in a trade and when we should not.
Most financial sites, shows, or whatever generally mention the setups and some even offer possible buying targets, but the ones that never develop usually get tossed in the business and nobody talks about them, so I thought we would look at some examples of what I like to call “breakdowns” or setups that don’t develop.
1. PMI Breaks Support/Trend Line
The initial setup called for a bounce off the support (green line) You can clearly see that on the third test the support broke and the stock finally caved through. If you were to continue watching this, we would now look for another “breakdown” possibility at the 50 day moving average (blue line). You guessed it… it fell through again. Now we look at the 200 day moving average (red line)/
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2. YRCW Breaks Support
The initial setup called for a bounce off the support (green line). The stock broke below, but we continue to watch and now we are met with another support at the 50 day moving average (blue line). YRCW seems to have bounced of that line. This can be confirmed with another up move followed by a close above the blue line in the coming days.
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3. BAC Breaks Support/Trend Line
Similar to the PMI example, we were looking for BAC to bounce off the support at both the 50 day moving average and 6 month trend line. Obviously they both broke through, but what makes this failure even more significant is that it broke a long-term trend line.
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4. AMD Breaks Below Wedge
Again, the initial setup included looking for a break out of the wedge. AMD actually ended up dangling by the support and breaking down. If we continue to watch, now we see what happens at the 50 day moving average.
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AA Does Not Clearly Break Support
So we’ve seen 4 clear examples of “breakdowns,” but I wanted to point out a rule I like to use. While support and resistance lines can be pretty accurate, they are not 100% definitive lines. Just because a stock dips below does not mean the setup is dead.
A rule I like to use in this scenario is to wait 1-2 full days and see if the stock closes below the support line. You can see in the example below that the stock dipped below the 50 day moving average which was acting as support, but it never closed below the line. The stock then went from $12.50 to $15. Had you clicked the trigger and left you would have missed the move.
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Now its important to note that just because these stocks failed doesn’t mean the trades are done for good. Many times there are other levels of support below. I recommend always watching the stock for at least another month. This allows yourself to get a good idea of how the stock moves and if really is a dead trade.