Consider the breakout of Phillip Morris in Figure 13. Note how the breakout was followed by a correction in the price where prices returned to the resistance level.
The price action following this remorseful period is crucial. One of two things can happen. Either the consensus of expectations will be that the new price is not warranted, in which case prices will move back to their previous level; or investors will accept the new price, in which case prices will continue to move in the direction of the penetration.
If, following traders' remorse, the consensus of expectations is that a new higher price is not warranted, a classic "bull trap" (or "false breakout") is created. As shown in the Figure 14, prices penetrated the resistance level at $67.50 (luring in a herd of bulls who expected prices to move higher), and then prices dropped back to below the resistance level leaving the bulls holding overpriced stock.
Similar sentiment creates a bear trap. Prices drop below a support level long enough to get the bears to sell (or sell short) and then bounce back above the support level leaving the bears out of the market (see Figure 15).
The other thing that can happen following traders' remorse is that investors expectations may change causing the new price to be accepted. In this case, prices will continue to move in the direction of the penetration (i.e., up if a resistance level was penetrated or down if a support level was penetrated). [See Figure 16.]
A good way to quantify expectations following a breakout is with the volume associated with the price breakout. If prices break through the support/resistance level with a large increase in volume and the traders' remorse period is on relatively low volume, it implies that the new expectations will rule (a minority of investors are remorseful). Conversely, if the breakout is on moderate volume and the "remorseful" period is on increased volume, it implies that very few investor expectations have changed and a return to the original expectations (i.e., original prices) is warranted.
