Breakout Failures Happen
One of the more enduring rules of thumb that traders
use in order to identify potential bounces is to look for potential support to
form at old resistance levels and vice versa.
This a good technique to apply particularly when a stock breaks out to new
highs from a good pattern setup–and then pulls back. Today’s move in Human
Genome Sciences
(
HGSI |
Quote |
Chart |
News |
PowerRating) is a good example of this. As I pointed out on
Wednesday, HGSI broke above an ascending triangle on 300% of its average daily
volume. The breakout’s technicals were favorable, so it appeared to have a good
chance of surviving.Â
When HGSI pulled back today, it initially pulled back to Wednesday’s breakout
level and stayed above that level for most of the session. I figured that if it
could close above that level, it would bode well for HGSI’s potential to
establish a base and move higher from it.
What happened into the close illustrates why it’s important to use stops.
HGSI broke down below that potential support level, thus making
Wednesday’s breakout a failure. At this point, a trader would be stopped out of
his position and watch the action in the coming days. The probing that HGSI has
been doing is a positive sign and it may just be that HGSI is clearing a path by
washing out weak hands. But for this scenario to be true, you’ll want to see
further action above the ascending triangle, followed by the building a new
base.
Till Friday,