Is it possible to determine whether a BREAKOUT will be false or effective?
After the Phase C test event (shock or LPS), the price will develop a trend movement in the direction of the least resistance.
The great professionals have already absorbed all the stock they need for their positions and have verified (through the jolt and the test) that they will not find much resistance in the subsequent advance of the price in their favour
The market is in imbalance and this provokes a strong movement that breaks the structure initiating the development of the cause that has been constructed previously.
This breakout movement itself is not an opportunity to trade; it only alerts us to a possible opportunity in the very near future. This opportunity is found in the immediate action, in the confirmation test.
- Change of Character
- How it appears on the graph
- The breakout without volume
- Keys to the breakout event
- Breakout does not offer an opportunity
- Sign of Strength
- Sign of Weakness
Change of Character
This is the second Change of Character (ChoCh) in the structure. We recall that the first occurs with Reaction Event #2, in which the market moves from a trend state to a range context.
In this occasion, this new ChoCh changes the context of the market putting an end to the lateralization of the price and giving beginning to a new trending Phase.
ChoCh is not only a strong movement; it is composed of two events: a strong movement and a slight retreat. This set forms the ChoCh. The change of character is identified from the origin of Phase C until the end of Phase D.
How it appears on the graph
We find ourselves in an environment of speed and this causes that movement to develop by means of candles in which a relative increase is observed in the ranges of the price as well as an increase in the volume.
This movement will fluidly break previous levels of liquidity denoting strong momentum. It is the representation of the market imbalance and the aggressiveness shown by traders.
The breakout without volume
Generally, ruptures should occur with increasing volume, although it is true that sometimes we could see such stocks without a particularly high volume increase. This suggests that the stock that remains available is essentially low and that therefore the operators in control will not need to make any special effort to easily displace the price.
For the example of bullish breakout, if we see that it occurs with narrow range candles and a volume in the middle, in principle we should be wary of its intentionality; but what may happen is that there is very little floating supply, that is, there are very few traders willing to sell. So the absence of sellers coupled with moderate aggressiveness on the part of buyers can lead to such an upward rupture without relatively high volume.
Keys to the breakout event
It is a key moment since we could be facing a potential shaking event, so it is essential to make a judicious evaluation of the price action and the volume after the break. To do this, we can help ourselves with some clues:
Not immediately re-entering in the trading range
It’s the most reliable sign of intentionality. We are going to look for an effective rupture that manages to stay out of range and fails in its attempts to re-enter the equilibrium zone.
In addition to observing that the movement is accompanied by an increase in price and volume ranges; and that it breaks previous control zones (previous highs and lows and minor Creek), the most powerful indication for valuing breakout as genuine is that the price manages to stay out of the range.
It denotes that there is no longer interest at lower prices and confirms that the movement is being supported by the big operators.
Representation of lack of interest
Another indication that would add strength to effective rupture would be to subsequently observe unintentional candles: narrow range, intertwined and with a volume smaller than that seen on the rupture movement.
Distance of the rupture
On the other hand, the distance covered by the price could be another indication to consider. Although there is no predefined distance, the distance should be obvious. In other words, the breakout that manages to move quite a few points away from the structure gives us greater confidence.
Breakout does not offer an opportunity
In operational terms, this action does not represent an operational opportunity. This is mainly because it is in a delicate area where a huge amount of cross orders will be taking place and it could change the control of the market.
What at first appears to be an effective break could turn into a jolt. And this is why it is more convenient to wait for the subsequent test with which to confirm the action definitively.
Even so, it is obviously not guaranteed that the operation will be successful. The market is an environment of constant uncertainty and is totally out of our control. As discretionary operators, all we can do is add signs that favor control on one side or the other to try to position ourselves. In the end it is a question of probabilities.
Sign of Strength
The Sign of Strength (SOS) is an upward movement that originates in the minimum of Phase C (Spring or LPS) and ends up producing the break of the high part of the range (Creek).
All this generates the change of character prior to the start of the upward movement outside the range. It is followed by a retreat to the broken Creek to generate the BackUp to the Edge of the Creek (BUEC) action. If it fails to stay above that zone and re-enters the range, the event would be an Upthrust (UT).
A great show of strength what denotes is an urgency of the institutions to enter. They are very bullish and buy aggressively
To appreciate that we can really be before an SOS we want to see that the bullish movement has ease of movement and that it reaches the midpoint of the range. In addition, any regression now should remain above the Spring minimum to show strength.
In the event that the upward movement fails to break the structure, this movement would be labeled as minor Sign Of Strength (mSOS).
If during Phase B we observe a movement with SOS characteristics, we could also label this event as minor SOS.
Sign Of Strength Bar
This is a bullish bar with a wide range, closing at highs and increasing volume, although it could also be a bullish gap.
It indicates the presence of strong demand for quality. It is the institutional buying point.
It could be used as an entry trigger. If in the operative area (after a shake, after a break and in trend) we observe a strength bar (SOS Bar), it is the definitive sign that the great professionals are supporting the upward movement and it provides us with a good opportunity to join in long.
Sign of Weakness
The Major Sign of Weakness (MSOW) is a strong bearish movement whose origin is in the maximum of Phase C (UTAD or LPSY) and causes the break of the lower part of the range (ICE) to start a new bearish trend.
It could be a second, third or fourth attempt to break the ICE and this is the most successful.
To assess the presence of the SOW we want to see that the bearish movement moves easily, covering a relatively long distance and that at least reaches half of the structure. In addition to this, any regression should not reach the maximu set by the UTAD.
If after the test event in Phase C this movement of weakness is not able to break the structure, we would label it as minor Sign of Weakness (mSOW). This is a sign of minor weakness.
We could also label as such any movement that during the development of Phase B meets these characteristics in price and volume.
Sign Of Weakness Bar
Visually it is seen as a bearish bar with a relative increase in price and volume ranges and its closing at lows in the candle range, although it could also be identified by a bearish gap
It signals the aggressiveness of the sellers and is therefore a professional point of sale.
The main use we can give it is as an entry trigger for sales operations. If in the operative zone (after a shake, after a break and in trend) we observe a bar of weakness (SOW Bar), it is the definitive signal that the great professionals are supporting the movement downwards and it provides us with a good opportunity to sell short.