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Breakdown, True or False?



Toddo this morning made an excellent point about the potential for a "false" breakout or breakdown in many of the charts we're watching. Why can't things ever be easy? Because then, to borrow one of my favorite Toddo aphorisms, "they wouldn't call it trading, they'd call it winning."

The chart of Cisco (CSCO: NASD) is a great illustration of this. The point & figure chart of CSCO shows that the stock, despite this morning's continuation of the after-hours selloff, will not give a sell signal until it ticks at 17.50. More importantly, this sell signal (if it occurs) is actually the potential initiation of a "shakeout" pattern, which would bullish. Read more about the shakeout here.

The key question we'll be looking to answer in the coming sessions is whether this potentially bullish pattern is the "false" breakdown, or whether the shakeout possibility itself is the "false" breakout.

The indicators I follow help me sort through these types of developments and with the Bullish Percents for the NASDAQ 100 and S&P 500 both negative, I think the probabilities are that IF the shakeout forms, it will ultimately fail. Just one man's opinion.

Be that as it may, the intermediate indicator we follow is clinging stubbornly to the offensive side, as are the longer-term bullish percent indicators.

There has been some discussion in trading and money management circles in recent weeks that technicians are as divided over the market's current state as they have been collectively in many years. One view that would put many of the technicians back in the same camp, so to speak, is that the current weakness in the market will turn out to be the "false" breakdown that Toddo mentioned, followed by a "false" breakout to the upside, which then concludes with a more substantive move lower. I know quite a few technicians who believe there is still upside potential left in the market, but who also believe we are simply in a cyclical rally phase within a larger structural bear market.

Those who are involved in the more subtle "nuances" of the market are consequently being lumped into the "bullish" camp by some, while those who are looking to discern the longer-term movements are being labeled the technical "bears".

For my part I try to stay emotionally detached and view my indicators with a "what is, is" attitude. This doesn't prevent me from constructing a thesis, mind you, but it does help prevent me from anticipating the anticipators and rolling dice instead of managing risk.

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