It looks like a reversal worth fading. Across the past 20 years of the major U.S. indices, the short side does not pay, and they tend to bounce instead.
A failed breakout is a classic pattern that many traders watch for. A stock pushes above a prior high, looks ready to run, then turns and closes back down.
The common interpretation is that buyers who chased the breakout are now trapped, and their stop-loss orders could trigger further downside. Because of this, failed breakouts are often viewed as shorting opportunities. We tested whether this approach has historically been profitable.
We ran it on the past 20 years of daily data for the S&P 500 and QQQ. For every failed-breakout day we measured the forward return and lined it up against what a random day returned over the same horizon. For a short to have an edge, the days that follow the pattern should be weaker than average. They were not.
We tested two versions of the pattern. The daily version occurs when a stock trades above the prior day's high but closes lower than its open, showing an intraday rejection of the breakout attempt. The weekly version follows the same logic but on a longer timeframe: the stock trades above the prior week's high and then closes lower for the week. Both represent a push to new highs that fails to hold by the end of the period.
After a daily failed breakout, the next day's performance was still positive in both indices:
| Market | After Failed Breakout | All Days | Closed Lower |
|---|---|---|---|
| S&P 500 | +0.108% | +0.043% | 42.5% |
| QQQ | +0.097% | +0.068% | 42.3% |
In both indices, the day after a failed breakout actually averaged a higher return than a typical day, the opposite of a short setup. It also closed lower well under half the time, so a short would have been underwater more often than not before accounting for costs.
We then ran the same test on weekly bars. A weekly failed breakout occurs when the market makes a new high relative to the prior week but closes lower for the week.
| Market | After Failed Breakout | All Weeks | Median | Closed Lower |
|---|---|---|---|---|
| S&P 500 | +0.085% | +0.200% | +0.426% | 43.7% |
| QQQ | -0.002% | +0.322% | +0.181% | 46.7% |
On a weekly basis, failed breakouts lead to weaker-than-average performance, especially in QQQ. However, neither the S&P 500 nor QQQ closes lower more than half the time after the setup. Without consistent downside, shorting weekly failed breakouts remains unprofitable on average.
On indices, rather than triggering a reversal, failed breakouts are more often followed by buying. A brief move above the prior high that fails usually represents a pause in an uptrend rather than a shift in direction.
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