This is nothing unusual. Let us assume that price has breaks through a major resistance level. Above that level, you may assume a collection of stop buy orders of traders who hold short positions. The execution of the stop orders may drive price into short term overbought territory, luring shorter time frame traders into opening new short positions, once the old shorts have been driven out.
This typically leads to a testing of the resistance level. In my opinion the first buyout is not valid until it has been confirmed, either
- by a close above resistance by a large margin
- by price staying above resistance for an extended time
- by a retest of resistance and rejection of an attempted price move below
Also a failure of a first breakout does not mean that the second attempt will fail, it is really a case by case analysis.
There are some known types of failures that are worth trading. Typically this occurs when price breaks out and produces a reversal spike and then quickly closes below resistance again (or above support), invalidating the breakout. But this failure must be clear. A number of setups is based on this type of failures
- Victor Sperandeo's 2B setup
- Linda Raschkes Turtle Soup setup
- Mark Fisher's Sushi Roll setup
- the Wolfe Wave setup
just to name a few.
The following 2 users say Thank You to Fat Tails for this post: