In financial markets, the best entry opportunity is often fleeting and easy to miss. Now, Solana’s SOL offers a timely second chance for those looking to trade bullish breakouts.
SOL price is up more than 7% this week to $193, bouncing off former resistance-turned-support identified by the trend line connecting the March and July highs. This line, and the one joining the April and August lows, define a large descending channel that comprises a long play range from March to October.
Prices broke out of the channel in early November, confirming an uptrend. SOL quickly rose to over $260 before retreating to the breakout point last week.
Technical analysts call the back-and-forth a bullish “retracement pattern.”
“Retracements occur when prices break up and then ‘return’ to their breakout level. The pullback is an excellent level to participate in the uptrend,” said Charles D. Kirkpatrick II and Julie R. Dahlquist in the third article . 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 successful trader to enter a position,” the authors write.
Breakout traders look for stocks that have had difficulty breaking above a specific level. When the price finally breaks, these traders enter the market, anticipating a substantial move in the direction of the breakout.
Trade breakouts require constant monitoring of the markets and careful evaluation of price and volume trends. Traders who miss the initial breakout often look to enter a successful pullback, such as SOL. These entries are generally perceived as low risk, as the potential exit point or stop loss can be placed just below the breakout point.
The pullback seen above can be explained by behavioral aspects of trading, particularly prospect theory, which says that people are generally risk-averse when it comes to making profits. In other words, when presented with potential profits, traders often book those profits rather than letting the winning trade execute.
This trend explains why the first post-breakout rally does not persist for long and prices usually fall to the breakout point. This is because traders who jumped on the breakout quickly take profits on a subsequent bullish move.
That’s when it gets interesting. Traders who missed the first breakout may view the pullback as a second opportunity to enter. They go long at the breakout point, ensuring that support remains intact. This explains SOL’s rebound from the key level.
If SOL continues to rise, those who took profits shortly after the initial breakout could regret doing so and take new long positions, further increasing the bullish momentum. This is how trends develop.
A similar pullback pattern played out perfectly in bitcoin (BTC) in the second half of 2023, setting the stage for a massive bull run.
Note that the bullish retracement pattern will be invalidated if the SOL price bounce fails, allowing a pullback towards the channel.
