A few weeks back, I kicked off the Intelligent Investor Series as part of my weekly commentaries. Th...
Trading Breakout Patterns
12/22/2014 6:00 am EST
Stephen Bigalow of CandlestickForum.com revisits an older blog post he still finds appropriate for educational purposes since it depicts a very good example of how to find great stock market trades with trading breakout patterns.
Find Great Stock Market Trades with Trading Breakout Patterns
Looking back at older blog posts in order to dislodge my writer’s block I came across a very good blog article where I discuss trading breakout patterns. While this information is dated, it is worth discussing again as it depicts a very good example of how you can find great stock market trades with trading breakout patterns. Using the candlestick patterns to interpret the results of a breakout situation offers a massive advantage to the Candlestick investor.
One main advantage of Candlestick patterns is that they can detect dramatic changes in investor sentiment. One of the main profit potentials for making money on big stock market trades is being able to analyze the investor sentiment upon a stock breakout situation.
A breakout is the dramatic movement of a stock market trade moving out of its usual trading area. It also has the component of a significant percentage increase in its standard daily trading range. This is usually complemented by a massive increase in volume. A breakout is typically the result of an unforeseen event or surprise result of a company’s operations. This can be affected by both internal as well as external elements. A key example was Invision Technologies, the company that manufactures the luggage scanning machines at airports. 9/11 brought this company to the forefront. The major move, a tremendously large white candle in that stock price, far above its trading range for the previous six months, quickly revealed a firm change of investor sentiment towards this company. Breakouts, revealed using Candlestick patterns, immediately identify the stock market trades with huge percentage gains potential.
Other trading breakout patterns are frequently caused by new fundamental potentials within a company’s product potential. Whatever causes the new investor sentiment in a stock, the resulting candle or candles offer the information needed that would point to the upside strength of a new move in a stock price. Dynamic Materials Corp. (BOOM) is a great illustration of a breakout. Note in the November chart, after trading for four years between $3 and $4 dollars a share, a news item produced a new investor view on this company. The fact that the white candle, that broke this stock out, closed near the high end of the trading range was an indication that upon this stock doubling in price in one day, investors still felt assured to stay in the stock and not take profits yet.
Very seldom is a breakout on strong volume and a huge percentage price move going to instantaneously vanish and move back down to the previous customary trading area. However, not all breakouts immediately go up. An exceedingly large percentage, however, do eventually move to much higher ground after the initial breakout. For those investors who follow the stock picks over the past few years, AVII is one of our long-term holds. That hold recommendation was based on the potential future potential of this company’s products. But when will that potential become evident?
Seven trading days ago, an announcement about receiving patents formed a breakout in AVII. A stock that trades approximately 100,000 to 300,000 shares per day moved up over 100% on over 40 million shares traded. This was an intense change of ownership in the stock. The Bearish Haramithe following day revealed that there would be some pullback action. Friday’s chart, as can be seen below, formed a Bullish Engulfing signal right at the base of the bullish candle that formed the breakout. The last six days of trading have seen an average of 5 million shares traded each day. The Bullish Engulfing signal reveals that the profit-taking selling may have stopped. (Remember, this is an old chart being used for demonstrative purposes only.)
The breakout definitely tells us something. There is now a different dynamic in this stock. As with most breakouts, the stock trend has an enormously high probability of moving higher, the first target testing the breakout candle high at approximately $4.20. However, over the long-term, meaning six weeks and greater, the upside potential could be higher. This is not an exact stock recommendation, but it provides some educational background on breakout situations. AVII fits into that category.
By Stephen Bigalow of CandlestickForum.com
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