The term breakdown in technical analysis refers to a price move below a key support level. Support levels are price levels that a security or other financial instrument has shown a tendency to find buying interest. A breakdown occurs when the price moves below this level and that buying interest fails to hold.
Breakdowns are usually considered bearish signals. It can usually indicate a potential trend reversal. Traders can use breakdowns as an opportunity for short selling or exiting long positions in the stock or other financial instruments.
Traders can identify a breakdown by looking for price levels that have been tested multiple times in the past and where the price has consistently found support. This could be a specific price level, a moving average, or another technical indicator. When the price of the asset moves below these levels, traders can view it as a signal for trend reversal. The stock or financial instrument is then likely to experience further downward price movement.
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