Undercut and Go

Note:  The historical stock examples given below are for EDUCATIONAL USE ONLY.  They ARE NOT to be used to make buy/sell decisions in today's market.  For more information, please read the HSR Terms of Use.

Description

This price behavior unfolds in three (3) steps:

Step 1:  Price breaks/undercuts a support level within a base/consolidation.

Step 2:  The following week or several weeks later, price rallies back inside the broken support level.

Step 3:  Price continues to rally and breaks out of its base/consolidation.

Behavior Note:  A weekly close below support in Step 1 is not required, but is preferred because it helps sell the break of support as a bearish development for the stock. This dynamic may contribute to the stock's recovery in the weeks that follow as bears cover (buy) their short positions.

What you need to know

In uptrending markets, surprises happen to the upside. 

An undercut of support may trigger selling because many investors who own stock see an undercut as a negative development for price.

Some may even get bearish enough to initiate short positions (bet that the stock will go lower) on the undercut.

Therefore, a failed breakdown/undercut of a support level may put a floor underneath price because it reduces future selling pressure and may trap short trades on the wrong side of the market.

With minimal people left to sell, price may rally.

Historical Stock Chart Examples 1A-1C:  UnitedHealth Group (UNH) 1990

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