Good question, and it certainly can do that, there is no reason why it can't. The reason that it usually does not happen and a bigger move follows is because of the support resistance metrics. Technical analysis give us key levels to watch which are simply high probability areas where buyers will want to step in if the price drops(support), or sellers will want to exit (resistance) if the price rises. This is why prices often turn/bounce off these key levels, because there is a sudden change in the buying vs selling. When it turns/bounces off support, more buyers are expected to jump on seeing the change of direction, and vice versa seeing it bounce off resistance.
But generally, buyers want it to go higher, sellers want it to go lower. So as a price rises to the overhead resistance, the seller jump on, but if buyers are still keen it does not bounce down very far and buyers step back in pushing it straight back to the resistance again. Eventually one side becomes exhausted, if it's buyers first then down she goes again, if it's sellers first then the price breaks through the level. This usually results in sellers temporarily withdrawing altogether and buyers jumping on, resulting in a bit of a pop as the levels breaks. Ideally, this will calm down and sellers will bring it back to their former level. As this is already a key level, buyers are now using it as a potential entry point, sellers are still looking to take profits and exit seeing it coming down again. The battle begins fresh, but this time on the other side of the key level. One becomes exhausted first and so the price begins to move. If the sellers become exhausted this results in a new bounce, thus validating this key level as the new support. And so the process repeats, but this time the buyers have a bit more momentum having won the battle.
When the price is stuck in a range though, it's a rinse and repeat of that scenario where bulls become exhaust at the top and bears become exhausted at the bottom for an extended period between the same resistance and support levels (which may or may not be tied to a specific price. Fibs/horizontals = specific price, diagonal trend lines/moving averages etc = adjusting price with time). But, markets don't like stagnation, they are happy when they are moving, so the longer a range continues, the more the market wants it to move and the more pressure builds up. Eventually one of the sides will fall resulting in that little pop. After a range though, if the overhead resistance falls, buyers pile on much bigger(or vice versa) resulting in a bigger move, or breakout. Sometimes it will just breakout then and there - running hard and not coming back, but it's always nice to see that retest to validate it before moving on.
Take for example our current chart - resistance is at 0.115 and has been for 3 months now. Every time the price gives it a nudge it solidifies it more and more as a key resistance level. Buyers become exhausted and sellers drive it down to the support. Sellers become exhausted and drive it back to resistance. Rinse/repeat(shown in yellow) In our case, we saw the sellers exhaust and the pop shown in the blue circle. But on the retest to validate it as a new support, the buyers couldn't maintain their buying and so we dropped back inside the range. We have a solid horizontal (0.115) as resistance, and our lower bound is a diagonal. Buyers have been jumping in and exhausting the sellers earlier over time, giving us the up sloping trend line. Now we are right in wedge and one or the other will break. While it is possible for it to break and continue wobbling around slowly, it's far more likely that a big move will follow a big range. It's a case of "finally the bulls won! I'm in" and buyers pile on giving the breakout legs.
(old picture, last week maybe?)
A fake out is similar, where the price pops through and then is driven back into the range - a fake breakout.This can be orchestrated though - for example we may see big money cause a pop to the lower side indicating a breakout lower, so all the sellers jump on board. Suddenly and by surprise, big money comes in and buys everything and we blast back through the range in the opposite direction with a true breakout upwards.
What will happen here? We will soon know. Or we will continue to travel horizontal and need to redraw the lower range trend line.
(20min delay)
