Technical Chart Breakout: How to Identify and Trade them 101

Kristin Alonzo

19-Dec-2017 15:01 PM



What is technical chart breakout? 

  • It refers to higher price, whereas the resistance is broken  and move higher from that price level, also known as moving out of consolidation phase, then the resistance becomes the support level for the breakout.

How to identify breakout and pick the best set-up?

  • There are broad asset class you can scan for breakout set-up.

  • Collect then select;  scan and compile  the stocks candidates, then pick, as a rule of thumb, pick  the one that has a long consolidation base, the longer the better.  8 weeks of consolidation should be the minimal average time, I derive on 8 weeks in my personal experience.

How to confirm breakout?

  • To confirm breakout, it has to break the current resistance with conviction with high volume compared to its daily average trading volume, furthermore closing price for the day 1 breakout should close on or above resistance level.

Sample: TF stock has been trading $8 -$10 in the last 8 weeks, $8 is support $10 is resistance, clearly that given price range is in consolidation/ basing action. On the 4th week, TF is trading at $10.40 and closed at $10.25, that scenario is a confirmed breakout.

Few things to keep in mind, stocks spends longer time in consolidation over breakout, on day 1 of breakout, you will usually see a heavier volume than average days with an intraday  move of  at least +5% ( for small caps stocks) +1% for (100+billion market cap).  

See chart below:

Sierra Oncology  #SRRA 

  • ~ spent 20 weeks consolidation, clear long signal entry on day 1 breakout rallied > +17%.

Abeona Therapeutics  #ABEO

  • ~ 24 weeks consolidation, on clear range bound of $4.50 - $6.5, clear long signal entry on day 1 breakout, moving  > +10% with heavy volume.

HollyFrontier Corp.  #HFC

  • ~ spent 36 weeks on consolidation, forming round bottom $25- $30 range. Breakout cycle conformed by 7 days green move with heavy volume pushing it at $32.40, well above $30 resistance.

Groupon INC  #GRPN 

As you can see from these 3 charts, they have a different pattern, but they share a common principle: series of higher high/ low with a long base of consoloditation. In my 7 years of  trading,  I live by these 2 simple strategies on technical trading.  I keep it simple and easy to understand. I find it confusing when applying too many technical tools. Whatever your trading style is, keep it, as long as you can identify pivot level support and resistance. The only thing that can judge your trading skills is your brokerage statement.

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