False positives are possible, I've had it happen to me. When "the machine beeped", I got a thorough pat-down and re-swabbed, and the next time "the machine did not beep" and I was on my way.
It's my understanding that TSA agents will not allow someone to pass who is consistently setting off the explosives alarm. What would be the purpose of checking for trace explosives residue if the agents simply disregard it when it triggers?
Of all the 'sigint' they collect on each passenger, I would bet a "repeated trace analysis fail" ranks up there with carrying box cutters as one of the more alarming indicators an agent has to deal with.
It sounds like the agents did everything they could to try to get a green light from trace analysis. Failing that, the passenger is obviously red flagged and it's "all systems go" to determine if they are really a threat. I can't imagine how else they would handle it.