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What's a failed breakout?

Updated: Mar 3, 2022

Technical Analysis 101: Failed Breakouts -> Banks and Copper in Trouble! $XLF $FCX



Thanks for taking the time to read today's blog post where we look at failed breakouts, where the price of an asset fails a previous high creating a failed breakout and a powerful reversal downward in price.

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When we enter a position or investment not only do we have to know when to enter we have to know when to exit too!

So what happened recently for me to get interested in exiting longs in banks and copper and even get short?!

A failed breakout!

What a Failed Breakout in Price on a Chart looks like
Failed Breakout in Price Pattern

I am sure your asking yourself, what are failed breakouts?! They are great spots to look for potential exit opportunities in the market where price breaks a previous high, stops out traders that are short above the previous high and then reverses below those highs to create intense selling because institutions and traders are selling their longs and shorts are re-entering their positions driving the market price lower of these assets. Recently, on the @wolf_financial Twitter Space, I gave an interview on how I was very wary of the banks instead of wanting to get long or add to my positions which I thought we could create a failed breakout.

Please find the recording here (you can find me talking about the market at the 1:00 hour mark): Good Morning Fintwit Space Hosted by @StockMKTNewz

We did just that! What a great call! We started seeing banks sell off this week on earnings reports, in fact I even started shorting $JPM and $DB. JPMorgan Chase & Co., an American multinational investment bank and financial services holding company headquartered in New York City, failed to hold $169 and had a higher low into earnings which cause a failed breakout and island reversal (we'll cover this in another blog post).

Now that we have a failed breakout and we are a in a comfortable position in our short we can look to take profits on our short at $136. The 38.2% retracement from the COVID lows and I potentially think we'll see $114 if the crash in the market continues, which is the 61.8% retracement.

JPMorgan Chase & Co. Failed Weekly Breakout with Fibonacci Retracement
JPMorgan Chase & Co. Failed Weekly Breakout

Remember! It's important to take profits and pay ourselves, this is what being disciplined helps us do on our trading journey and compounds our portfolios long term. There will always be another trade or investment, so it's important to take profits to ensure we keep building our long term capital. Even if we happen to be long banks as soon as we saw that the price of JP Morgan Chase couldn't get over all time highs before earnings with RSI failing to get overbought (over 70 means overbought) told us to take profits on the daily chart. Once we got this failed breakout we've gotten an extremely sharp move lower!

This happened in the bank Exchange Traded Fund, the Financial Select Sector SPDR Fund, NYSE/ARCA: $XLF, U.S. Banks and Freeport-McMoRan Inc, NYSE: $FCX (an American mining company based in the Freeport-McMoRan Center, in Phoenix, Arizona), this past week when we broke below previous highs. From there we got a swift whipsaw in the opposite direction, amazing right!

Let's first take a look at $XLF. Our line in the sand to be long above the 200 SMA was $37.5 from December, which was the day we got bullish the market when everyone was bearish. After that we only wanted to be long if we could hold $40.83, which was the October highs.

Guess what! We failed that price level creating a failed breakout and even had a bear

flag setup on the daily chart. The charts love to tell us what's going on in the market, all we have to do is listen! And if we did we would have been exiting banks, hedging our positions and maybe even getting short. Banks having a failed breakout is going to be a big issue for the market, our first target for exiting shorts is $37, once that objective is met we'll look to see what's next.

Last, let's look at $FCX which to me was pretty much a lay up trade as other areas of the market were getting sold off. Are 52 week high recently was $46.1, we hit the price on January 18th, 2022 and reversed immediately. To me this is was one of the easier trades as we have a defined price we are looking at, we set an alert when it gets hit and then enter the trade based off it breaking up or down.

We are looking for $38 as target to take profits on shorts first which coincides with the 200 SMA (Simple Moving Average) with a potential move even lower to $36, the 61.8% retracement. Again we saw that RSI didn't get overbought on the daily chart which was a good indication to me that we would get selling as we hit 52 week highs.

And sheeeeesh have we got a move lower since! A lot of people hate volatility that are long the market, but as traders that are short the market volatility allows us to make more money in a quicker timeframe when our positioned in the correct direction. So embrace the trend and don't fight it!

Enjoy your weekend and remember to...

Trade Confidently,

Miguel Ferreira (@wizdaytrader)


Essex's Trading Quote of the Day (QotD)

“Don't confuse brains with a bull market."

Humphrey Neil, founder of the Contrary Opinion Forum in 1963


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