False break – warning sign – that preceded China A50 collapse

If you recognised this pattern, you could avoid China’s worst stock market crash or even make money going short.

Whether you call it ‘failed rally’, failed break, false breakout, bull trap or wash and rinse or any other name, it is a highly recognisable price action. And it showed up at the high of China A50 before the worst crash in the Chinese stock market that prompted the People’s Bank of China to cut rates.

FTSE China A50 daily chart

FTSE China A50 daily chart

False breaks like this is a recurring theme in  this blog where we see it as 1) a phenomenon that happens again and again, 2) that it becomes a strategy for traders to fade a rally and 3) that it might not be a ‘natural’ phenomenon but a ‘man-made‘ one.

This is one price action that every trader has to remember by heart and the nemesis of everyone who buys high hoping to sell higher.

There are at least 2 other signs that traders can spot.

A) False break at previous high.
B) Price breaks support and prints pullback as retest.
C) Price reaction to previous resistance-turn-potential support.

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