How to play 'Failed Failures

Twisted logic can devise very profitable trading strategies. For example, we're taught early in our careers to buy breakouts and sell breakdowns. But market contrarians pay their bills doing the exact opposite. They wait for a move to fail, and then sell the breakout or buy the breakdown. These mind-bending tactics don't end there. Many smart traders take it one step further and buy when the failure fails. Let's back up and examine this way of thinking one step at a time. Most of us follow a common path -- we pile into stocks because they break out of resistance. But contrarians know exactly how you'll react when your pretty breakout drops like a rock. So they guess where your stops are hidden and enter short sales at the same price to capitalize on your misfortune. Now twist your brain a little more and take this reasoning to the next level. The stock breaks out -- you sit on your hands. The stock fails the breakout -- you wait and do nothing. But when the stock jumps back above the breakout price -- you buy. Got it? Modern markets try to burn everyone before they launch definable trends. My friend Bo Yoder calls this action a "rinse job." Whether through manipulation or mechanics, price gets drawn like a magnet through common support and resistance levels. This whipsaw movement cleans out the stops before a market ramps higher or lower. Not a pleasant experience when you're caught holding the bag, but an excellent opportunity when you come off the sidelines.