[ANALYSIS] Of true and false market breakouts 

The market’s movement is turning to be difficult to follow, let alone to predict – especially of its supposed recent breakout.  

A breakout is said to happen when the price of a stock, commodity or the market, as a whole, moves above a certain resistance level.  When said variables move beyond their estimated support level, this is also called a breakout.  However, when the movement of said variables goes below the support level, it is called a breakdown or false (as in failed) breakout. 

A resistance level is aptly explained by the following definition: “It is where selling interest appears over time, blocking further upside progress.” Thus, there is “resistance” to the direction pursued.  The support level, on the other hand, is simply the opposite.  It is where buying interest appears the most, in which the upside direction is effectively given “support.”   

Resistance can just be “a single price point such as the (session’s) high of the day, or hourly high (for day traders).” It can be also a zone (several area points) as in the market’s earlier named support-resistance zone of 6,400 to 6,600 or the presently claimed support-resistance zone of 6,600 to 6,800.   

As further explained, a resistance zone is the area in which bulls (buyers) and bears (sellers) battle it out, as in “to test the resistance level.”  This could be by small amounts.  

Fast forward, if the multiple attempts to advance fails, the resistance zone is said to be still filled with more bears who can reverse the market’s upward direction, and ultimately changed its trend to go downwards.     

Do you see this as what is happening in the market?  It might or may not be.  Let’s look closer at the market’s recent trading results for underlying clues.

Trading record

As explained, when a variable like a stock, commodity or the market as a whole move beyond its estimated support level, this is also called a breakout.  

Considering that the market is the subject of our present analysis, it has been trading above its newly established 6,600 support level or conversely as the market’s previous resistance level.   This makes the market to be technically moving above the breakout level.  

Per market data, the market breached for the first time the estimated 6,600 resistance level on the market’s 15^th week of trading for the year on Friday, April 28, when it closed at 6,625.08.  

It managed to climb higher a week after on the following Friday, May 5.  The market closed at 6,685.66, up 60.58 points or 0.09%.  

Since then, the market traded within the range of said two points of April 28 and May 5.  The same story unraveled last week but with an interesting twist.  

When the market was forced to close on its session’s low of 6,628.64 on Thursday, May 18, it rallied the following day, Friday, May 19, and closed higher at its session high of 6,664.55. 

This favorable last-minute move fueled expectations over the weekend that the market will continue its climb when it opens this week, and challenge the new estimated 6,750 or 6.800 resistance level.

Contrary to such expectations, this did not happen:  On Monday, May 22, the market fell.  It closed at 6,620,83, down 43.72 points or 0.65% on a high volume of 1.73bn shares and total value turnover of P7.03bn.  Interestingly, foreign investors were net buyers as they also accounted for 51.42% of total market transactions for the day. 

The market lost further ground on Tuesday, May 23.  It closed lower by a hair from the support level of 6,600.  To be precise it closed at 6,603,56, down 17,27 points or 0.26%.  Total volume was again high at 1.16bn shares accompanied by a moderate total value turnover of P6.04bn.  

The fall was also precipitated by the trading tack taken by foreign investors.  They were not only predominantly net sellers for the day, they were also largely out of the market.  Their market participation amounted to 35.26% of total market transactions only.  

On Wednesday, May 24, the market opened below the support level of 6,600.  At the close of trading for the day, though, the market managed to close at 6,615.95 (which was the session’s high for the day).  

This enabled the market to stay safe from certain reversal.  It made a net gain for the day of 12.39 points or 0.18%.  Total volume, on the other hand, was only 750 million shares and total value turnover was very low at P3.80bn.  Foreign investors helped save the day.  They turned net buyers and maintained a net presence equivalent to 45.0% of total market transactions.   

Summary 

It seems the market made multiple attempts to go higher in the past several weeks since April 28.  The attempts only resulted in an advance of less than 90 points from the support level of 6,600 in three separate times since then.  The rest of the time, the market managed to stay afloat only within a few points above the 6,600 level.  During these times, too, trading volumes are thin and value turnover is low. 

Taken from their normal context, this kind of trading results are seen as tacit signs of a market breakout that is bound to fail.

However, the character of trading results in the last three days this week appears to be slightly changing.  Aside from maintaining a high volume (relative to normal volume), total value turnover is starting to become high, as well.  This element was not present in the past several weeks.   

If I were to make a forward interpretation to this emerging difference in the market’s trading performance, together with anticipated positive internal and external fundamental leads and events that are expected to materialize soon, we may expect a true breakout to occur soon. – Rappler.com

(The article has been prepared for general circulation for the reading public and must not be construed as an offer, or solicitation of an offer to buy or sell any securities or financial instruments whether referred to herein or otherwise.  Moreover, the public should be aware that the writer or any investing parties mentioned in the column may have a conflict of interest that could affect the objectivity of their reported or mentioned investment activity.   You may reach the author at densomera@yahoo.com)