How General Market Correction Causes a Post-Breakout Shakeout

There is always a strong chance of a CAN SLIM quality stock giving excellent returns to the investor after a successful breakout from a proper base.

But, sometimes breakouts fail miserably. A stock clears a buy point, then falls 8% below the buy point soon after. Following our sell rule, designed to protect hard-earned capital, you cut losses short.

Sometimes, failed breakouts are explainable. Even if they’re not, the first thing to keep in mind is that breakouts have the best chance of working in the early stages of a market uptrend. That’s the time when fresh institutional money is coming in from the sidelines.

Reasons Why Breakouts Can Fail

Stocks tend to struggle when the distribution day count starts to get elevated. Distribution days get counted when the market is in a Confirmed Uptrend or an Uptrend Under Pressure. Currently, the market status is Uptrend Under Pressure and the distribution day count stands at seven on the Nifty and eight on the Sensex.

If you buy a breakout when the distribution day count is elevated, the odds aren’t in your favor for a successful breakout.

Buying a breakout late in a bull market lowers the odds of success. If you’re buying breakouts and they’re consistently not working, selling pressure is likely building in the broad market that may be a little difficult to recognize.

Transport Corporation Of India (TCI) broke out of a 57-week-long consolidation base pattern on August 17, 2018 as it jumped 8.3% and cleared its pivot price of Rs 349.00 (1). It had a good Price Strength Rating of 82 and Buyer Demand of B. On fundamentals front, the Company had reported strong double-digit sales and earnings growth in the past five quarters.

But, the market added six distribution days after TCI’s breakout. The stock traded in a buy range (0-5% above pivot price) for a couple of weeks (2) but was dragged down with the overall weakness in the market. On September 5, TCI corrected more than 8% from our add price and hit our stop-loss (3). It went on to correct further and is currently trading 14% below its all-time high.

While TCI has strong fundamentals, it is likely to form a new base pattern considering its failed breakout and the overall weakness in the market. An ideal approach would be to keep the stock on the watchlist and wait for it to break out of a fresh base pattern. But, more importantly, wait for the market condition to turn in your favour before initiating a fresh position in the scrip.


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