Thursday, March 04, 2010

Shorting failed breakouts from 3 recent examples?

Recently I blogged about the high probability set up known as shorting a failed breakout. This article proved rather popular, I received E-mails and high profile trader Tweets about its instructional content.

Read this critical post first by going here:

A few days ago, a much celebrated (and justly so) blogger named Pradeep Bonde (Stock Bee blog fame) blogged about a bunch of quality breakouts with trading potential, I presume from the long side.

IMAX & YUII WRLS are 3 stock picks from his breakout list from Tuesday's after hours market.

Both are examples, arguably, of a failed breakout short plays.

IMAX seemed destined to take out a key high, but on Wednesday, optimistic longs were stunned when an analyst got in the way and folks headed for the exits. It continued to unimpress today hitting the lows of Wednesday at one point. On Wednesday the stock went from green to red then faded nicely into a selloff.

YUII also played out nicely. The stock gapped up Wednesday, then quickly saw green to red movement. The result was a fading selloff that spanned into the Thursday session as well.

WRLS gapped down Wednesday and sold off more today.

But the human mind only wants to remember successes like MDF from this same list:

When it all goes according to script, as in MDF, everyone is happy and you look like you knew it all along. People forget about what the success and failure rates of breakouts is when they see stocks like MDF meet their expectations. They observe an individual outcome that works like the experts say it should, and black out the ones that fail. This is human nature, and it and trading sucessfully are often at odds.

The breakout picks from Stock Bee were not lousy selections, but as always, the hard right edge of the chart cliché applies. Nobody knows what will happen for sure, but you can always depend on human nature.

The best failed breakout shorting plays arise from setups that look so good that they practically scream off the chart, which ensures tons of technical analysts who think they are all that and a bag of chips in identifying perfect setups are going to be in the stock long. This money is going to be in play, depend on it and their stops to help you out if things do not go according to plan.

This means when and if the pick fails, a domino effect of selling occurs and stop losses are triggered along the way, accelerating the ensuing panic to hit the sell button. Be the trader who takes the other side when they do!

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1 comment:

Anonymous said...

Good point T, i think your just describing a double top though, another known technical pattern that trader's exploit, so it just turns into a fight between the breakouters and the double toppers.