Daytrader Heaven. . Sort Of

• July 21, 2000
• Eddie Kwong

While I wouldn’t go so far as to say that Thursday’s
session was daytrader heaven, there were some interesting setups in some of the
better-trending stocks. 

In fact, Extreme Networks’
(
EXTR |
Quote |
Chart |
News |
PowerRating) chart is a veritable classroom for daytraders looking to fine-tune their ability to recognize classical chart
patterns.

The action from Thursday, July 20, 2000 shows patterns that we
often see across different time frames, i.e., daily, weekly, etc.  I’ll have to admit, though, intraday traders have the advantage of sometimes being able to
watch patterns like these unfold several times a day. 

There are several things I look for in a chart pattern in order to
determine whether it’s a viable trading setup:

• Tight range. The more volatility has contracted from
  the norm, the more likely that the breakout will be of an explosive
  magnitude.

• Support not far below. Once the pattern breaks out, I
  want an easily identifiable support level at which to put my stop. For
  example, a stop would be placed about an 1/8 of a point below the breakout
  level of a flag. 

• Pattern occurs within a strong trend. If a strong
  trend is in place, then I can formulate a directional bias for the impending
  breakout. 

• Breakout occurs in sync with the trend. If the breakout
  occurs in sync with the trend, I will assume that there’s a greater likelihood
  that the breakout will see some follow-through in the direction of the
  momentum built up by the trend. Of course, my stop is in place in case I’m
  wrong.

Have a great weekend. We’ll see you on Monday,

Eddie