2 High-Volume Breakouts Worth Trading

01/18/2012 9:30 am EST


Donald Pendergast

Founder, Linear Trading Systems LLC

A powerful trading system has turned out strong buy signals on two large-caps that clearly have the attention of big market players.

Most trading platforms offer hundreds of technical indicators, dozens of systems, analysis templates, and lots of expert advisor overlays. In MetaStock, its Explorer feature can also help a trader hone in on stocks meeting very specific sets of criteria. I have used MetaStock since the summer of 2007, and it truly is an effective piece of trading/analysis software.

This isn't a commercial for MetaStock, but recently, I began playing with the Equis-Price and Volume Breakout, which displays securities where the price increased 5% and the volume is 50% above a 50-day moving average.

It's a terrific tool for finding stocks that leap higher on days with increasing volume, and when combined with the additional visual analysis insights that come with the CS Scientific Hybrid Trade Screen, it helps confirm the likelihood of further follow through in the direction of the breakout.

Only two stocks in the S&P 500 made the cut on this particular price/volume breakout screen, Jacobs Engineering Group (JEC) and Broadcom (BRCM). Note how massive the increase was in BRCM's daily volume, as compared to its 50-day moving average volume.

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Running my Standard & Poor's 500 index component stock list through the price/volume exploration and making sure it was set to analyze daily rather than weekly price data generated only those two stock candidates. The biggest gainer was Jacobs Engineering (JEC), closely followed by Broadcom (BRCM).

Both were up by more than 5% on January 12, and each saw its daily trading volume up by more than 50% (JEC up by 51% and BRCM up an astounding 108% over its average daily volume).

Clearly, some sort of big money interests just can't seem to get enough of either stock, and this means that even ordinary retail traders like us may be offered the opportunity to ride either one of these large-caps to further gains.

As we look at the next daily chart—of JEC (Figure 2)—we can easily see why we may have good reason to feel a sense of anticipation, hoping for another bullish run in JEC to play out over the next week or two.

Just look at the bottom of the chart and note the dark gray ribbons on the CS Scientific expert. These identify periods when a market is in a strong uptrend and may still have some room left to run before pulling back.

Note also the green shaded areas on the chart directly above the gray ribbons. Many times, JEC has continued moving higher, sometimes for as much as two weeks after going gray. So, it always makes sense to give a stock every benefit of the doubt even though this particular MetaStock expert says "Go long."

Once you've found strong price/volume breakout candidates, you can evaluate their past trending history by applying the CS Scientific Hybrid Trade screen in MetaStock 11. JEC has certainly done well during at least three of the strong trend gray ribbon zones in the past 14 months.

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With such powerful technical confirmations that JEC's line of least resistance may be toward higher prices, choosing a trading strategy should be relatively painless.

Stock-only traders may want to focus on buying intraday pullbacks on 30-minute charts, riding this large-cap horse for as long as it's got legs to run higher. Such swing traders might even want to hold overnight if conditions warrant; say, after a big trend day when prices basically just keep on rising all day with only minor pullbacks to support.

More conservative traders will probably want to check out the covered-call route; although the bid-ask spreads aren't especially tight and open interest is only 404 contracts, the February 2012 JEC $43 covered call still looks reasonably attractive here.

Traders can even consider using the lower trend line on the chart as a sort of trailing stop on such a position, as a clear breakdown would likely mean the end of the road for JEC's current upward move. As always, use wise position-sizing strategies and don't go overboard or get overly attached to any position in the market.

Choose your spot wisely, size it conservatively, manage your risk, make your money (or limit your loss), and then get out after you've done your business with the stock. There's always another good trade set-up brewing somewhere in the stock market.

By Don Pendergast, systems trader and designer, Linear Trading Systems

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