US Steel Shows False Breakout and Reversal

Jul 2, 2008: 2:43 PM CST

Shockingly to me and many traders, US Steel (X) violated a breakout pattern in a strong uptrend to create a reversal and strong plunge, suddenly invalidating the pattern and shattering support in a short period of time.

US Steel broke a potential triple top and horizontal resistance pattern at the $185 per share level, drawing in anxious buyers and forcing shorts to cover their positions.

Shortly after the break, price retested the breakout zone, which actually set up a higher probability trade because it prevented the need to ‘chase’ price, and it also gave a clear stop-loss level just under the breakout zone, or in this case also beneath the rising 20 period moving average.

All bullishness evaporated as the stock plunged over the last two sessions to take out both the breakout zone support, 20 and 50 period daily EMA support, and the lows of the consolidation pattern (resembling a rectangle) support.

Also, yesterday’s sell-off was accompanied by the highest volume level the chart recorded saw so far – not a good sign for the bulls, as today’s action is showing us.

The intraday chart shows two bear flag patterns and a strong down-trend for educational purposes:

This stock ‘scorched’ the buyers by reversing after a valid buy signal (resistance break) and shows us that we as traders deal in probabilities – never certainties.  Even if we perceive the odds of a successful trade at being 75%, there is still a 25% chance the trade will fail and take out our stop.

This is where money and risk management come in to help make a trader have a higher chance at success than not.

Study valid trades that fail, and try not to be upset when a valid set-up results in a stop-loss.

You cannot win every trade, unfortunately.

1 Comment

One Response to “US Steel Shows False Breakout and Reversal”

  1. Richard Says:

    In the linked article, I related that there was a massive unwinding of the yen carry trade, which complemented two others that occurred on June 6, 2008, and June 20, 2008, which can be seen in the BRICs, EEB, a traditional yen carry trade falling 3.8%.

    US Steel had a “false breakout” due to a “pop” in the US Dollar, relative to the yen, when the USD/JPY went to 108.4.

    US Steel really got hit hard, not only by a turn lower in the USD/JPY to 105.86, but also by today’s unwdinding of the yen carry trade, where investors who borrow from the Bank of Japan at 0.5% interest, sold stocks to repay their loans.

    Today’s massive sell off in interest rate differentially favored investments can be seen in the fall of the following basic material stocks as well
    James River Coal, JRCC, 22.1% (producer of both steam and metallurgical coal)
    Cleveland-Cliffs, CLF, 17.2% (producer of iron ore pellets)
    Consol Energy, CNX, 14.6% (producer of steam coal)
    AK Steel Holding Corp, AKS, 13.6% (steel manufacturer)
    United States Steel, X, 12.5% (US based steel manufacturer)
    Intrepid Potash, IPI, 8.2%
    BHP Billiton Ltd, 6.2%, (producer of base metals)
    Peru Copper, PCU, 5.8%,
    Aluminum Corp of China, ACH, 3.9%

    Deflation is coming to stock wealth and US Steel. I recommend that one be invested in gold.