A Failed Break of a Range will lead to a Test of the Other Side
Here's a great email question from a reader:
I'd like to get your opinion about a question I saw on a forum. To be honest I wonder if there is a proper answer
but nevertheless I think this behaviour occurs often. It is a form of strong
rejection at an extreme of a range leading to the other extreme. Is it just a
form of self-fulfilling prophecy?
I'm curious why when a trading range is violated, then rejected and comes back
into acceptance (or previous range) does it usually go to the extreme other side
of the range? Just curious what would be the thinking behind what is going on
behind that action.
Thanks for your email. This is a great question.
A failed break of a range will move to test the other side!
This is, in my opinion, a very useful belief to have about market structure and
price movement. It is a concept I rely upon in my own trading. In fact, I'll
expect price to not only move to test the other side, but to also provide a
serious attempt at breakout.
I have no stats to back this idea. I'm not a stats type of trader. But
experience tells me this is a useful market belief. And as you'll see below it's
an idea that has been in the trading world for the good part of a century, if
This is of course not the only way that a range can end. They also might show a
gradual shift in sentiment as the intra-range price action moves to produce
rising swing lows, compressing price against the upper range resistance in the
form of an ascending triangle. Volatility compression leads to volatility
expansion via an eventual break out and change to a trending environment.
There are other ways as well.
But still, the "false break and reversal to test and break the other side" is
So what's going on here?
First let me say that proper analysis of any sequence of price action should
consider the context within which it occurs. If we wished to explain this
particular example, we should look to higher timeframe context, macro-economic
and political factors, news influence, etc, etc, etc.
Every situation is unique and wider context should be considered.
We won't do that here!
Instead, let's just look from a "model" perspective, as this will provide
something useful for future application.
And from a model perspective, it's hard to go past basic Wyckoff. This is such a
beautiful example of his model for an accumulation phase.
If you're not familiar with Wyckoff, I highly recommend studying his
In this model, the downtrend ends with a selling climax as the professional
smart money absorbs all the panicked selling, as the last of the less-informed
traders or investors desperately exit their losing long positions or enter short
late into the move.
The market settles into a sideways trading range. The smart money uses the range
to continue to accumulate a large net-long position on any secondary tests of
the range support. Any remaining supply caps price at range resistance; aided if
necessary by the professionals who may offload some of their position just to
hold price in the range and give the perception of a weak market.
The smart money professionals will continue to absorb supply as the range
continues, until such time as they sense supply diminishing. In an ideal
scenario you'll see volume reduce towards the right of the range.
Allowing price to break the lows of the range allows the professionals to shake
out any of the late shorts, confirming an absence of supply, and further
accumulating a net-long position at even more wholesale prices.
With an absence of supply, the market is now primed for a rally. There is very
little selling pressure to hold price down. The market will usually rally with
strength from the spring. A subsequent break of the highs of the range will
confirm a change to a trend (mark-up) environment.
This is a very basic overview.
If you want to explore it in more detail, you'll find a lot of information
online. Google "Wyckoff accumulation phase".
To start you off with an excellent article, have a look at this piece by
and Max von Lichtenstein.
In this article the authors goes into great detail about both accumulation and
distribution. The most relevant part of the article, for our discussion,
involves the section on accumulation, phases C and D. Phase C being the shakeout at the bottom of the range
and phase D being the
subsequent rally and breakout.
I highly recommend reading the whole article. And also anything else you can
find from Hank Pruden.
Enough background though... your question is "what would be the thinking behind
what is going on behind that action?"
The above model provides an answer from a Wyckoff perspective. The "smart money"
has used the range in order to accumulate a sizeable net-long position,
absorbing all available supply.
With supply exhausted, and a final shakeout of the late shorts proving no
further supply, who is left to oppose the upmove?
If you don't like the "smart money" idea, then let's look at it simply from a
trader sentiment perspective.
Firstly note the strength of the rally within the range, following the failed
break. An initial strong momentum move on 11/29, likely propelled by stop driven
orderflow. A retest and largely inside day pause on 12/02. And then an explosive
move higher on 12/03, likely again propelled by stop driven orderflow and a
clear change to a momentum mindset for the traders involved in this market. Note
the strength of the test of the range highs compared with previous
tests of the highs on 11/06, 11/11 and 11/21.
The explosive movement higher following the failed break of range support, is
easily explained by stop driven orderflow. This initial strength then attracts
new demand as more and more traders and trading systems also seek entry long
into the explosive momentum move. The intra-range mindset is now one of
momentum, rather than reversion to the mean.
Why does it break the top?
It's a simple question of "why would anyone want to fade this strength?"
Shorts on 11/06, 11/11 and 11/21 were easy, given the weakness that showed at
But the mindset of traders will be different this time.
Those who might have shorted at previous highs would have not only been
targeting the range lows, but also operating from the perspective that there
would be significant downside movement, should price break the range lows. The
difference now is the fact that they've seen the downside break fail. There is
no further downside potential. There is very little incentive to sell at the
range highs, against the strength of a stop driven momentum move and with no
real expectation of a successful break lower.
There is very little incentive to initiate a new short position at these highs.
Reduced supply at the range highs results in a higher likelihood of a break of
the range highs.
All this is of course a generalisation, and has involved little to no
consideration of the context of this particular price sequence. But hopefully
it's given you something that you find useful.
All price movement is a result of the net orderflow within the market. And that
orderflow is a result of the sentiment of the market participants and the
conviction with which they act through buying and selling. In seeking to answer
any question as to why a particular move happens in such a way, always seek to
consider the thought processes of the other traders. The failed break below the
range has forced a shift in sentiment. There is EVERY reason to be bullish
following this break as shorts are stopped out (buy order) and new momentum
longs are attracted into the market. And there is very little reason to be short
at all given the proven failure of the break lower.
Thanks again for your excellent question. Hopefully something here in my amateur
response has helped turn on a lightbulb. If not, seek an answer from the expert
through a Google search on Wyckoff theory.
Final thought... It's fascinating that the break occurred on the day prior to
the Thanksgiving holiday! I don't have stats to quantify this (as I said I'm not
a stats type of guy) but if you're comfortable accepting generalisations such as
"a failed break of a range will often move to test the opposite side", then
here's another: "when a significant break or price extension occurs
pre-holidays, watch for opportunity following the holidays if/when the move