Buying the Breakout

by: Barry Ritholtz

Consider the chart below: If it was an index or an individual stock, would you buy it?


breakout

I know I would.

The chart, courtesy of Charles Kirk, poses an interesting trick question: It's actually an inverted chart of the Dow over the past year. It is presented upside down, so last week's market break and turmoil shows up as a breakout - not a breakdown. In the original Dow chart (invert the one above), it is an obvious breakdown.

The psychological question Charles poses is this: If you would buy the inverted chart, then wouldn't you most certainly sell the inverted version (if not outright short it)?

It's a very clever way to check your own biases. The dip buyers today are somewhat equivalent to the sellers of the above breakout.

Nicely done, Charles!