News that Reckitt Benckiser is thought to be in merger talks with Colgate-Palmolive sent the share price into new highs. The move follows a long term breakout, see chart.
In general, long term breakouts of either support or resistance, or any pattern such as triangles or head and shoulders, are accompanied by short term pull backs.
This is because the short term pull back is a subwave inside the wave of larger degree (the long term wave) and, as a result, will retrace a portion of the previous subwave before resuming in the direction of the wave of larger degree. Unfortunately the breaking of the long term trendline may happen at a time when the internal subwave is nearing an end, therefore going long on the breakout may result in the position being stopped out on the pull back.
This is why, after a long term breakout, it is preferable to wait for a pull back before going long. As you can see on the Reckitt Benckiser chart, prices broke out at the end of September to reach 3170. The ensuing pull back to 2970 provided an opportunity to buy.
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