An "Everyman" Question

Priapusmon,

My answer to your question went way-y-y over the 4,096 characters that the comment section allows, so I have to answer it here:

(Or in a simple way, what is causing or forcing it to fall the same distance from the breaking point?)

That question is clearer to me than your initial question. Thanks for clarifying.

I suspect that it has something to do with Newton's Third (?) Law of Thermodynamics, which states something like, "For every action, there's an equal and opposite reaction," but I'm not sure. I'm rotten in science. Got a "D" in Physics, so take that under advisement ;)

Let's say that for six months (random number), a stock trades between 20...24...20....24...20 ...24...20... 24. Trading EXACTLY between those numbers only would happen in a perfect world, but it's just an example of well-established (six months) "range-bound" trading. Trading in this example is "bounded" by a "range" of four points.

Players are buying when the stock hits 20, or near that price. Players are selling and/or selling short when the stock hits 24, or near that price, and that strategy is working out fine.

Now, let's say that one day, the stock gets back to 24 where players normally were selling and/or selling short, expecting it to selloff four points, back to the bottom of the range at 20, but this time the stock goes through 24.00, and starts trading at 24.02 ... 24.05 ... 24.09 ... 24.15 ... etc.

The stock clearly has broken out of the four point range, moving to those higher prices. How high? We don't know, but the prior four point range "suggests" that if the stock kept rallying four points from 20 to 24, and kept selling off four points from 24 back to 20, there "likely" is a similar move of four points coming, to 28, fueled by some, or all of the following:

Fundamentals:

1. Improved outlook for earnings
2. An actual release of earnings that is better than the market expected
3. Improved outlook for the sector in which the stock trades
4. Improved outlook for the economy, in general

Technicals:

1. At trades above 24, everyone who bought the stock between 20 and 24 is holding a winner. Many of them will want to add to their positions. "Double down on winners, not on losers (there's an except to the latter, but that's another discussion)."

2. Players who weren't in the stock at all want to buy the technical breakout. The four point trading range FINALLY has been resolved, and the resolution is to the upside. Players become aware of the technical breakout from various sources, for example: (1) stocks making new highs; (2) vol % increases; (3) analysts upgrade; (4) news about the underlying commodity/sector, etc.

Players get an appetite for the stock and say, "YUM! YUM! GIMME SOME!"

3. Players who always correctly sold when the stock got to 24 now stop doing that because they recognize that 24 isn't resistance for the stock any more. That not only takes selling pressure off the stock because they stop selling their shares, but many of those players will correctly abandon The Bear camp, and correctly join The Bull camp and buy the technical breakout.

4. Players who always correctly shorted the stock at 24 and who don't BUY TO COVER on the technical breakout to the upside are now Bears who will become "unwilling Bulls" as the stock moves higher, above 24. When the stock hits 25 ... 26 ... even though their sentiment might still be bearish, they begin to capitulate (surrender) and BUY TO COVER their short postion. That's more fuel for the rally.

5. Other Bears, of the stubborn, "PermaBear" variety, will short the technical breakout and also will keep shorting the stock all the way up. Those Bears also will be continually pressured to BUY TO COVER their short positions as the stock rallies, and if the stock really takes off on them and the stock goes to 40 ... 50 ... 60, Bears who stubbornly remain short the stock not only will be forced to BUY TO COVER, they might also be forced out the market entirely by losing most, or all, of their capital (Example: The 500 point rally in this morning's NASDAQ chart, after "THE TELL." Insistent Bears get hurt very badly in a move like that if they refuse to capitulate).

Much of the ensuing rally after the breakout above 24 (unless it's a false breakout) is due to "Buying Begets Buying." Bulls are buying, and Bears are BUYING TO COVER. The proverbial "everyone" is a buyer of the stock, fueling the rally. If there is a "continuation" pattern along the way that breaks out to the upside, that's more fuel for the rally. If/when the stock gets to 28, or reasonably close, players know that the last trading range was four points. They have a nice gain and some of them take profits. That certainly doesn't mean that the stock can't go MUCH higher than the 28 target, and stocks often do. The 28 target only tells us that the "measured move" of four points (the prior trading range) got MADE. Nothing else, beyond that.

All of above is just my own understanding of the basic theory behind a move, "in a perfect world." We know that technical analysis certainly isn't an exact science, which is why targets only help to point us in the right direction and are guesstimates of "what we're aiming for."

All of the above also is just my own opinion, and not technical analysis dogma by any means. If you asked your question of 20 different analysts, you'd probably get 20 different answers. I'm not very good at the mechanics of, or the exact theories behind, WHY things work.

Now, listen, Priapusmon. As much as Melf Elf loves you, a lot of the stuff that you ask me is in textbooks at your local library, bookstore, or on the internet. I don't want to short-change anyone and blow them off with with a two second answer, so your questions take a lot of time to answer, make me think too hard and hurt my brain. Your questions also seem to be based in wanting an exact reason for things, and in wanting to know when we can be sure about something, and trust it, like a technical breakout or breakdown. Believe me, we ALL can relate to wanting to know those things.

SHORT ANSWER: (Which I should have gone with in the first place): Technical analysis is an inexact science (some say that it isn't a science at all) and we never can be sure about ANYTHING unless/until we get the final confirmation that a target has been MADE, or reasonably approximated, and by then it's too late to make a play for that particular pattern target if we didn't buy the breakout or breakdown, or buy a retest of the breakout, or buy somewhere along the way.

Because of that lack of certitude in the market, which always is present, a technical breakout or breakdown is a case of "take your best shot, if you want to play it," depending on the many, many factors that we discuss. We simply aren't going to win all of our trades, and that fact needs to be accepted before playing.

Now, take it easy on Ol' Melf Elf, okay? (grin...grin)