In Bull markets, 70% of the Breakdowns are False and they turn out to be excellent buying Opportunity.
What is False Breakdown?
When a stock does not hold up support as dip buyers anticipate and crack below it, then it creates short term panic among bulls. It also results in lots of shorting. But then as it always happens in Bull market - Long term Institutional buyers step in and that results in massive short covering and fresh buying resulting in huge upmove in short period of time. In simple terms, A breakdown that fails resulting in sharp reversal.
Here's one recent example: Tata Motors.
I covered Tata Motors stock on August 07 2014. Here's what I said in conclusion there
Look out for stock reaction on August 11. Generally, false breakdown can be excellent buying opportunity i.e. stock breaks down post earnings below 75 dma intra-day and then recovers by the end of the trading day. That will be good buy signal then. Any long position should have stop loss at 3% below 75 dma.
Here's what happened?
Tata Motors stock broke down just before earnings announcement but then on August 11 made a sharp comeback above 75 dma. This completed the classic False Breakdown pattern. As a result of this - Tata Motors saw huge price move in following 5 days where it rallied from 446 to 520.
False Breakdown results in sharp upmove because majority of the traders are wrongly positioned in the stock and that's why it is an excellent bullish pattern.
Disclaimer – The state of the market notes is Deepak’s perspective on the market. The column is purely for educational purpose. Nothing contained herein is a solicitation to trade or a recommendation of a specific trade. By reading this publication you agree to make no trade relying in whole or in part on the comments of the writers