And DOWN we go again.
One of the most critical issues investors need to be aware of in today’s markets is the pattern of a “false breakout.”
Most of the most famous technical patterns (head and shoulders, triangle pattern, a rising wedge, etc.) are in fact consolidation patterns. That is, there is no guaranteed outcome in terms of direction: the market can break either up or down out of them.
The key issue is what happens after the initial breakout. If the move is sustained, then it’s the real thing. But if the move is short-lived, and the market reverses… then it’s called a “false breakout.”
False breakouts matter a lot because typically they are followed by VERY rapid VERY VIOLENT moves. The reason for this is that the investors who took bets on the initial consolidation pattern resolving a particular way quickly discover they are wrong and rush to the exits.
Consider the market today. The S&P 500 broke out of a massive megaphone pattern to the upside. However, rather than going parabolic, the market has struggled to rally. And we’re now falling back down to retest former resistance… indicating that this may in fact be a false breakout.
Why does this matter? Because if we do not hold here, we could easily go to a downside target of 1825.
Looking at what’s happening to Oil… I think we could see something even worse happen.
Indeed, what if the $9 trillion US Dollar carry trade REALLY blows up and we see the Dollar move up to 110 or even higher? What happens to all the trades that are based on a “cheap dollar”?
Indeed, what if stocks as a whole staged a massive 3 years false breakout of a wedge pattern in 2011? What happens if the market reverses this?
Could the whole move post-2011 be one massive money fueled false breakout?
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