This first quiz should be pretty easy, draw the breakdown line, and mark the breakdown bar.
When price truly breaks down from a sideways range with increased spread and a low close, it is very difficult for price to recover in the near term. Many holders will have been trapped above, and if price attempts to recover the lost ground, those trapped holders will sell into the recovery in an attempt to 'get out' and get their money back. It is this selling pressure which forms the increased resistance price feels when attempting to recover from a price break down. Price will often make some sort of attempt to recover, sometimes it is a really decent attempt, and at other times only a half hearted attempt, but generally price will fail to recover the lost ground and move lower, sometimes considerably lower (if the selling starts a domino effect). While a breakdown like this can be devastating to a share price over time, is not always a good indication of medium or longer term prospects, it is usually an indicator of near term, or short term market sentiment.
Price breakdowns are usually more serious when they occur after a longer sideways action or trading range, and often the more decisive the breakdown bar, the stronger the intent of the principle. So for instance - if price has been trading roughly sideways for a long period (months perhaps), and then breaks down with a really wide spread, closing low, and makes only a weak attempt to recover before continuing lower, I would expect the overall impact to be much more serious than when price has only traded sideways for a couple of weeks, and then price only breaks down with an average spread, closing just a touch below the sideways range (and in this second case I would also expect a price recovery would be a higher possibility, and the depth and duration of the pullback may also be reduced).
Finally, breakdowns do not have to be seen after a period of distribution (although they often are), they can occur at any stage of the cycle, but most often after price has been moving sideways in a trading range. When you get good at recognising them, it is also possible to see an early warning using an oblique line (trend line or slanting line), although I find they can be less consistent than the more traditional horizontal line.
I keep putting up examples of price breakdowns because they happen regularly in the stock market, and if you can recognise the principle, it may be of some help - whether to look at opening a short position, finish taking profits, selling part of a long position with the intention of buying back at a cheaper price, or selling a long position entirely.
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This second one is a bit less clear cut, but is also commonly seen in the markets.
Once you have made your decision, you don't have to say 'exactly' what you would do, just a general answer is fine.
What you really need to do is decide if the stock is being seriously bought or not, because if there is strong buying or accumulation being seen, usually those positions will be defended to some degree, and when the time right a price mark up can begin.
If there is not strong buying, or the buying is only weak, then selling pressure can easily overwhelm the demand, and price will probably only go roughly sideways, and price will move down if sustained selling continues.
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You should be looking for a long position.
cheers
