Breakouts and Breakdowns

Breakdowns involve a break in an uptrend or breaching a major moving average like the 50, 150 or 200 day moving averages. These breaks can spell large moves in the opposite direction of the prior move. Every day, numerous stocks break major trends. Technical traders seek these stocks for candidates for purchase or shorting. 

Stocks can break major trends before the fundamental logic for a such move is obvious or known. Generally, a stock breaking below a major moving average will move down to next major moving average unless major support creates the demand to stop the fall. 

Once a stock has reversed trend, it can get overbought on a reversal and go back a test the point where it broke out or broke down. Stocks do not move in straight lines, they move in saw tooth patterns. 

It is a bad sign for stocks to break down on low volume because, generally, price follows volume. Higher volume is a strong positive while lighter volume can presage a break down that has longer to go. Often, stocks in a downtrend will experience a climactic sell-off which allows all the weak holders out of the stock, setting up a major buying opportunity. Remember, bullish breakouts require higher volume. Weak volume breakouts normally will not follow through. 

Another pattern to watch for is the "Key Reversal Day". This a buy signal for short term traders and investors looking for prime entry points. Key Reversal Days occur on exhaustions sell-offs where a stock will gap down at the open, but finish above the prior day close and at the top of the day's trading range. 

Conversely, a gap open following a long up- move where the stock trade way up, then closes below the prior day close and at the bottom of today's range can signal some important downside action.