Predicting a Stock Chart Breakdown

Posted by Blain Reinkensmeyer on Wednesday June 27, 2007

I was browsing through my stock charts and ran across a Silver ETF, SLV which had a breakdown yesterday. The chart was perfect for some simple technical analysis that could have saved shareholders a big piece of their investment.

Note: The following technical analysis implies the concepts below:

Stock Chart Breakdown

slv2.png

This chart is a perfect example of using moving averages, volume, and simple support to save your rear end. This can explained like such:

  1. SLV tests $129ish support which is also where the 200 day moving average is, but stock closes back up around $130.
  2. (green box) SLV trades below moving average support and trades on distribution volume, stop losses at $128 should have triggered regardless. The stock ends up CLOSING below key support, and the chart shows signs of a technical breakdown.
  3. SLV Price Gaps and trades down heavily the next day on extremely heavy distribution volume. If you didn’t get out via stop or discipline the day prior, then your stops should have triggered very early in this day.

Placing stop loss orders below key supports and/or just simply being disciplined would have saved any position you had in SLV. The day the stock closed below its key moving averages support on distribution volume was the sign of a potential breakdown in the very near future. In this case the breakdown came the following day, and was costly.

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Comment by Reza Subscribed to comments via email
2007-07-22 10:23:44
Hi, i am a newbie in stock investment and starting to pick up some FA and TA. I came across your site and notice the great piece of information and knowledge you shared. Thanks for all those. By the way i got 1 question on the chart above? Why isn’t there a breakout between 14 and 21 May? I see the condition is similar to the one on 25 May. Please explain
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Comment by Blain
2007-07-23 11:14:16
Great question man, the reason it isn’t the same situation is actually for something you can’t see on the chart, but the stock that day closed all the way at intraday highs and on its 200 moving average support. So, though it was technical distribution and the stock fell below that support line, since it rebounded and closed back basically even it was actually a bullish sign. Comparing the two, the 2nd one had distribution volume and distinctly closed below the support line, which makes the big difference in this situation.
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