Updated on March 14, 2023
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.
How to interpret the breakdown?
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.
How to identify breakdowns?
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.