When bullish momentum turns on a dime – navigating the treacherous waters of failed breakouts
The markets can be merciless teachers. Just when traders begin celebrating breakouts and planning their next big moves, the tide can shift dramatically, leaving even seasoned professionals scrambling to adjust. Recent price action across major indices has delivered exactly this scenario – a textbook example of false breakouts that demand immediate attention from every serious market participant.
If you’ve been tracking the recent market action, you’ve witnessed something that happens with surprising regularity in trading: the classic bull trap. After showing promising strength and breaking out above significant resistance levels, multiple indices have experienced dramatic reversals that caught many traders off guard.
Let’s break down what we’re seeing across the major market averages and what it means for your trading strategy going forward.
The daily chart of the S&P 500 ETF (SPY) reveals a particularly concerning development. What makes this situation noteworthy is that we’re not looking at a quick pop above resistance followed by an immediate rejection – we’ve experienced what I’d call a legitimate false breakout.
Last week, SPY closed above prior highs for several consecutive sessions, convincing many traders that the breakout was genuine. This is precisely what makes a bull trap so dangerous – it provides enough confirmation to pull in bullish traders before reversing course.
Friday’s plunge created a particularly ugly rejection on the chart. Looking at the price action, we can observe some important technical details:
The critical question now becomes: Can the price action find support quickly and recover back above the 21 EMA to potentially push higher? Or are we looking at a break of the 50-day MA with sustained trading below this key indicator?
If SPY can hold above the 50-day moving average, there’s still hope for the bulls. However, further selling below this level could potentially open the door for a retest of the range low. Despite these short-term concerns, it’s worth noting that we remain in what I’d characterize as a larger “chop fest” on the daily timeframe, with the rising 200-day MA potentially providing support if selling continues.
Moving to the tech-heavy Nasdaq 100, the QQQ ETF has similarly failed its first breakout attempt above the range high, but with an additional bearish signal – it occurred on significantly higher volume Friday. While QQQ still trades above its 50-day MA, the price action is concerning.
In a single session, we saw five days’ worth of prior lows taken out. That’s the kind of price action that demands respect and caution.
Just like with SPY, the 50-day moving average has become the critical level to monitor. Traders should watch closely to see:
If QQQ manages to bounce from current levels, we’ll need to observe how it reacts to the first test of the declining 8-day moving average, and whether it can subsequently retake the 20-day MA.
Should QQQ fail to hold the 50-day MA, the next logical support levels would be around the 510 area, followed by the 500 level (the base low), with the rising 200-day MA positioned just below. While I’m not predicting the price will necessarily reach these lower levels, they become realistic targets if support at the 50-day MA fails to hold in the coming sessions.
The daily chart of the mid-cap growth ETF (IWP) presents a slightly different technical picture than SPY and QQQ. Here, price has already sliced through both the 50-day MA and the prior low – a potentially more bearish development.
IWP deserves special attention because it serves as an excellent proxy for growth stocks in general. In years past, many traders used IWM (Russell 2000 ETF) for this purpose, but IWP has proven to be a more reliable indicator of growth stock behavior in recent markets. It consistently reflects when growth sectors are leading or lagging, making it a valuable tool in our technical analysis arsenal.
With IWP already trading below its 50-day moving average, the priority becomes whether it can reclaim this level within the next few days. Failure to do so could send prices back toward the base low, potentially erasing weeks of upward progress.
Another growth-focused ETF worth monitoring is FFTY, the IBD 50 ETF. This fund had been displaying notable relative strength before the recent pullback, with a clear breakout above its base high. Friday’s brutal selling action completely demolished this setup, creating what can only be described as a nasty breakdown.
With FFTY closing at session lows, a test of both the 200-day moving average and the base low appears increasingly possible in the coming days.
The severe selling pressure we witnessed has significant implications for market leadership. When broad market averages experience this kind of rejection, it typically creates substantial damage to the daily charts of most leadership stocks in the short term.
Even the strongest names will need time to repair their technical damage. While a handful of resilient charts may have weathered the storm better than others and could potentially remain in play, most stocks hit by Friday’s selling won’t present high-probability setups in the immediate future.
After this type of market action, we often see sharp, volatile bounces lasting two to three days. However, these bounces rarely offer reliable trading opportunities with manageable risk parameters. The setups simply lack the edge that disciplined traders require.
Given the current technical landscape across multiple indices, what’s the prudent approach for traders? In the short term, patience may be the most valuable strategy.
This isn’t the environment to aggressively hunt for long positions. If you identify charts that have held up remarkably well through the selling pressure, and if the broader market shows signs of stabilization, small positions with strict risk management might be justified. But this certainly isn’t the time to “load the boat” on the long side.
Equally important, this isn’t the time to attempt to quickly recover recent losses. The emotional impulse toward “revenge trading” – trying to make back losses immediately through aggressive positioning – typically leads to further damage. Market conditions could deteriorate further from here, and fighting the prevailing trend rarely ends well.
The wisest course of action is likely:
While Friday’s market meltdown was undeniably powerful, don’t make the mistake of abandoning your routine market analysis. Even during challenging market environments, disciplined scanning for potential opportunities remains essential.
Some traders might think, “The market broke down and charts look ugly – there’s no point in scanning today.” This mindset is precisely what you should avoid. Continue your regular scanning process because:
Trading without a pre-session plan often leads to impulsive decisions driven by real-time price movements – a recipe for emotional mistakes and suboptimal entries or exits.
As we navigate these challenging market conditions, it’s helpful to review some critical technical analysis concepts that inform our decision-making:
False Breakout: When price moves above resistance (or below support) but fails to sustain the move, often trapping traders who entered based on the initial breakout signal.
Bull Trap: A specific type of false breakout where prices briefly rise above resistance, encouraging bullish positions, before reversing lower – “trapping” those bulls in losing trades.
Moving Average (MA): A key technical indicator showing the average price over a specific time period. Common periods include the 8-day, 21-day, 50-day, and 200-day MAs, each providing different perspectives on trend strength and potential support/resistance levels.
Exponential Moving Average (EMA): A type of moving average that places greater weight on recent price data, making it more responsive to new information than a simple moving average.
Relative Strength: A measure of how a security is performing compared to the broader market or its sector. Stocks showing positive relative strength often continue outperforming, particularly when the broader market stabilizes.
Chop Fest: A colloquial term describing a sideways, volatile market characterized by whipsaws and lack of sustained directional momentum – essentially a trading range bound by support and resistance.
Base Low/High: The lowest/highest point in a consolidation pattern or trading range, often serving as significant support or resistance when retested.
As we process these significant market developments, several important lessons emerge:
Remember, false breakouts aren’t just frustrating technical events – they’re valuable information about market sentiment and institutional positioning. By paying close attention to how markets respond in the days following these rejections, you gain crucial insights for navigating whatever comes next.
The market’s message is clear: remain vigilant, manage risk diligently, and as always – trade what you see, not what you think.
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