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Thursday, January 26, 2006
Market Recap
The market rallied today as we were expecting. Our pre-market alert reiterated the expectation this morning. The Dow rose 99 points while the Nasdaq had a powerful gain of 22 points and the S&P gained 9 points. This was the bounce we have been waiting for, and tonight we have updated charts for these big three indices.
Alert: Bought ADLR
Today we played a breakout on ADLR. Our alert went off at $15.00 and the stock moved quickly through the buy point and raced higher on good volume as we thought. This will happen fast on these types of breakouts where the stock has based for awhile. As a result, by the time you probably received the email, it was too late to act. Most of the time when you get an alert, there is plenty of time to get in at our price or close to it. Occasionally the stock will take off before you receive the alert but that does not happen often. This particular stock closed the session all the way back down at the buy point, so those who did not chase it can now get in if they so choose. This situation brings up a good topic for a commentary tonight.
Breakout Anticipation
Breakout moves take place from areas that large numbers of traders are regarding as support and resistance. Frequently these areas are price levels that have held as highs or lows over multiple time frames (morning and afternoon; consecutive days; etc.). When these levels are finally breached, fresh volume enters the stock to take advantage of the breakout, propelling the stock beyond its S/R level. The key to maximizing profits by playing breakouts is to be prepared for them ahead of time and anticipate the breakout.
Normally we say wait for the buy point (breakout point) before entering. This is because if you get in early, the stock may not breakout and then you have dead money on your hands. However, if you can recognize that your money is dead and exit the trade if the breakout does not occur as you anticipated, then getting in early is a good strategy.
You can try to get in early because valid breakout moves will not let traders get back in at the prior support/resistance point and, will not even let you work orders to get into the stock that is breaking out. With valid breakouts, the market is moving too fast to try and get cute with an order. Once the resistance level is pierced and volume expands, it is off to the races as new buyers establish value at much higher levels. Once the breakout occurs, the only winning strategy is to get on board as quickly as possible. The trader who does not want to pay up by entering at the market is left behind.
So anticipating the breakout can be a good strategy as long as you know you will be stopping out of the trade if the breakout does not happen. ADLR came back to the buy point at the end of the day. This is negative and a tight stop just below this entry is advised. If this stock sinks back into the base, we want no part of it.
A General Rule
The general rule for breakout trading is that the duration of the prior range is proportional to the extent of the following breakout move. A range that extends for multiple days will not normally exhaust after several one-minute bars. One can buy highs in such a market with reasonable assurance that the move has further to go.
Stocks behave like schools of fish. When a small group of leaders changes direction, the entire school is sure to follow. Knowing this will allow you to anticipate a move in other stocks in a group if you happen to miss the breakout of the leader in the group. The key to anticipating market breakouts rather than getting on board once they have begun is finding the leaders of the school.
The leaders will make their breakout moves well in advance of the broad market. Recognizing breakout moves and maybe even anticipating them requires preparation the night before and having a planned entry price (buy stop order placed in advance). The charts in our commentary each night will help you in this plan. Also, our pre-market day trade watch list is based on this anticipation strategy and is a good list to use to plan your trades for the day.
Today's Bonus Chart: NDAQ
Click the following link to view today's bonus chart in the Public Chart lists:
http://stockcharts.com/def/servlet/Favorites.CServ... (first chart)
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