Channel Surfing

Despite the prevalence of false breakouts, there are times when a market
will seem to fail to follow through and drift back into the previous
zone, only to reestablish a channel that carries it back in the direction
of the original breakout and beyond. So a return to a prior zone does not
guarantee that your trade has gone wrong. A saving grace will often be the
channel that forms just before a breakout occurs and this can be used to
judge the progress of any breakout. If this channel holds despite returning
within the prior zone then there is a possibility of a successful trade. If it
fails then the odds of success dramatically drop with it and you need to
exit. An example of a channel that brings a false breakout back to life can
be seen in figure 2-6.

So a fai lure can still become a success as long as a channel manages to

11,1
A prior high is broken, but the breakout fails to hold
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But the up move re·establishes itself using the channel line as support

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Feeder Cattle

hold. Even if it did turn out to be a bad trade, you may still be able to take
advantage of the signal in another way. A fai lure has the tendency to carry
a market a considerable distance in the opposite direction, so reversing
your position can turn out to be a very profitable trade. This is particularly
true when it involved a break of a major brick wall ofsupport or resistance
and failed to follow through. Remember, if it took a considerable amount
offorce to break through it once, it takes a similar force to break through it
a second time. In essence, it is a breakout trade that breaks out again, only
this time in the opposite direction. Don't take this move lightly because
the market will not. It is the nature ofthe market to implode on itself when
there is a failure and this tendency offers one more opportunity for profit
from a breakout or in this case, a fai3l9ed breakout.