In the financial markets, the best entry opportunities are often short-lived and easily missed. Today, Solana’s SOL is flashing a timely second chance for those looking to trade bullish breakouts.
SOL price is up more than 7% this week at $193, returning to the previous resistance-turned-support identified by the trendline connecting the highs from March and July. This line, and the one that joins the April and August lows, defines a large downward channel consisting of a long range of play from March to October.
Prices broke out of the channel in early November, confirming a bullish bias. SOL quickly climbed above $260 before returning to last week’s breakout point.
The roundtrip is called a bullish “throwback pattern” by technical analysts.
“Retracements occur when prices break up and then ‘return’ to their exit level. A retracement is a good level from which to participate in an uptrend,” said Charles D. Kirkpatrick II and Julie R. Dahlquist in the third edition of “Technical Analysis: The Complete Resource for Financial Market Technicians.”
“They tend to be very short in time and distance but often provide a second, lower-risk opportunity for a breakout trader to enter a position,” the authors wrote.
Breakout traders look for securities that have struggled to break a certain level. When the price finally passes, these traders will enter the market, expecting a big movement in the direction of the breakout.
Trading breakouts requires constant monitoring of the markets and careful assessment of price and volume trends. Traders who miss the initial breakout often want to enter a successful reversal, such as SOL’s. These entries are generally considered low risk because the potential exit point or stop loss can be placed just below the breakout point.
The above reversal can be explained by behavioral aspects of trading, particularly the prospect theory, which states that people are generally risk averse when it comes to securing gains. In other words, when presented with potential profits, traders often book those gains instead of letting the winning trade run.
This tendency explains why the initial post-breakout rally does not last long and prices usually return to the breakout point. This is because traders who jump on the breakout quickly earn higher subsequent moves.
That’s when it gets interesting. Traders who missed the initial breakout may find the throwback a second chance to enter. They linger on the breakout point, ensuring that support remains intact. This explains the bounce of SOL from the primary level.
If SOL continues to rise, profit-takers soon after the initial breakout may regret doing so and linger, further adding to the bullish momentum. That’s how trends evolve.
A similar throwback pattern played ideal in bitcoin (BTC) in the second half of 2023, setting the stage for a massive bull run.
Note that the bullish throwback pattern will be invalidated if the SOL price is falling, allowing for a retrace back into the channel.
