Breakdowns-Breakouts

A breakdown occurs when price action moves below a support level or zone, turning it into resistance while a breakout refers to price action moving above a resistance level or zone and turning it into support. Breakdowns/breakouts need to be confirmed by a rise in trading volume in order to be relevant and volatility usually spikes. Following a breakdown/breakout, the move is often reversed as the new support/resistance level is tested. This gives traders a second chance to enter the extension of the breakdown/breakout. Other aspects of technical analysis are also applied in order to gauge if the move is sustainable.

A breakdown below a support zone suggests a rise in bearish momentum and an extension of the sell-off which led to the breakdown. A breakdown below a resistance zone can indicate a short-term event such as profit taking following a strong rally or a longer-term trend reversal if accompanied by fundamental catalysts.

A breakout above a resistance zone points towards a rise in bullish momentum which can keep the rally alive as the breakout is extended further to the upside. A breakout above a support zone can either be related to a short-term event such as a short-covering rally or indicate the start of a long-term uptrend if fundamental data provided a shift in conditions.

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