Identifying Breakouts

By Peter Lim Platinum Quality Author

If you need help in identifying when a stock has already break out of a trading range and is ready for a rally or move into uptrend, here is a simplified guide.

Call up the chart of the stock you are interested in, and perform the following steps:

1. Volume Analysis

When stocks fall in price, there should be an increase in volume to denote selling or distribution. There is normally a sudden spike in volume when the stock hits a near bottom or bottom. This volume spike shows that selling is exhausted, as the last remaining weak holders of the stock give up in despair as prices continue to drop and throw out their last remaining stocks, causing the volume spike.

Correspondingly, look for an increase in volume as the trend changes and there is an break out in price, when buyers come in to pick up the stock as they perceive the price has gone down low enough.

2. Pattern Analysis

Before a stock break out of a trading or consolidation range, there are tell tale signs and specific patterns that you can usually find. Among the bottoming patterns are candlestick patterns such as hammers, inverted hammers, piercing lines, rising stars, bullish engulfing patterns. Of notable interest is the inside day or included day pattern, which is commonly sighted before the outbreak. When there is an inside day, pay attention!

3. Trendlines

Trendlines is a simple way to identify outbreaks in trend. Connect the tops of previous high price ranges or the bottoms of previous low price ranges to form a trendline. A penetration upwards of the trendline will denote a outbreak to the upside and a outbreak to the downside denotes further correction.

4. Oscillators

Favorite oscillators to show overbought and oversold regions of a stock are the Stochastics and its close cousin, the Stoch-RSI. By themselves, they can lead to whipsaws as oscillators can be overbought or oversold for long periods. So oscillators like these should be used in conjunction with other indicators for synergistic interpretation. The out break into uptrends is denoted by the stochastics or the stoch-rsi moving upwards above the lower level which is normally fixed at 20% ( oversold level), and where 80% is the overbought region.

Trading outbreaks is a fine art, where some successful traders have been very successful in removing all emotion that prevent them from taking immediate action. Some of them have “perfected” their trading systems to recognise trends and patterns using just price bars and time- without any other technical indicators – so that they can trade their proven systems without being paralysed by too much analysis. To them, trading is both fun and profitable, as they have proven to outlast the many market crashes and have continued to increase their personal wealth by trading.

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