I have been mainly writing about Breakout Ideas for a while now, so let's change things around and talk about trading False Breakouts.
There will be times when Breakouts in chart patterns may fail to continue in the intended direction, leading to a False Breakout.
The moment market realizes that group of traders are caught in a false breakout, a lot of stop loss and "U-turn" orders will be triggered to propel price to do a short sprint in the opposite direction.
The resulting price action are called a "Long Squeeze" or a "Short Squeeze"
Here is an example of a "Short Squeeze":
(1) Price for Google ( GOOGL ) has been trading in an uptrend line between July 2012 and July 2014.
Price has increased from about 300.00 to around 600.00 during this period.
(2) After July 2014, price has failed to achieve a significant new high and was beginning to form a formation.
This Formation had broken below the 520.00 Neckline during Dec 2015. However, price action after this Breakout have failed to bring the price lower.
Also it is likely that some traders, who have traded the breakout, have placed stop loss orders above 540.00.
(3) Instead of price trading lower, indicated by the Pattern, we note that price has managed to find support twice at 500.00 and trade back above the Neckline of 520.00.
We also observed that this double support at 500.00 is in fact a minor , which has broken out of the neckline of 540.00.
This indicates to us that the breakout move in (2) has been successfully reversed.
Given (2) and (3), we conclude that the Breakout move has failed and price is likely to trade higher.
This is projected to be due to the triggering of stop loss orders and "U-turn" trades placed above 540.00.
Anytime from now as long as price is trading above 540.00.
All long trades should be closed by 13 March 2015.
580.00, based on the measurement of the minor in (3)
Advanced traders can also consider taking profit when (14) reaches around 70. 0000
There is a risk that traders will try another attempt to go short and bring the price lower, resulting in a trading loss.
Also, there is a risk that price will get resisted at 570.00 and trades back downwards, so take note to place stop loss above break even, should the trade becomes slightly profitable.
Lastly as this trade is just a false break out trade, price momentum can last for only the short term and traders should look to exit the trade as quickly as possible, latest by 13 March 2015.
Double Top: http://stockcharts.com/school/doku.php?id=chart_school:chart_analysis:chart_patterns:double_top_reversal
Double Bottom: http://stockcharts.com/school/doku.php?id=chart_school:chart_analysis:chart_patterns:double_bottom_reversal
Short Squeeze: http://www.investinganswers.com/financial-dictionary/real-estate/short-squeeze-2045
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