Here’s One Way To Enter A Stock Ahead Of Its Breakout
The
market appears to be lacking any real conviction lately. Volume
has fallen off over the last couple of weeks as the major indices search for
a direction. The ranges that have formed are 2012-2054 for the Nasdaq, and 1122-1159
for the S&P 500. As you might expect, I am not seeing too many spectacular
breakouts or breakdowns lately.
This may be a good time
to play your trades a little closer to the vest until the ranges are broken
and a direction established. Don’t slack off, though. Even range-bound
markets are capable of producing some very nice moves in individual issues and
sectors. If you have some winning positions established prior to the market
breaking its trading range, then those positions could get a nice boost if the
market asserts itself in the same direction.
Let’s take a look
at some interesting charts that I noticed last week.
Here’s a daily chart
of Aeropostale
(
ARO |
Quote |
Chart |
News |
PowerRating) from
Feb. 12. As you can see it was set up in a cup & handle formation. (Since
then it has seen a nice pullback and move higher.)
src=”https://tradingmarkets.com/media/2004/Hanna/rh021804-01.gif” />
As I’ve mentioned many times before, one way to enter a stock ahead of
its breakout is to look for an entry pattern in a smaller time frame.
On Feb 11, ARO gapped lower
but quickly reversed and ran higher on good volume. Many times stocks will have
quick shakeouts below the low of the handle before they make their breakout.
If you were watching the stock, this morning action may have caught your attention.
As the day moved on, a cup & handle formed on the 5-minute chart. Rather
than waiting for the breakout of the daily cup & handle, you could take
the breakout of the 5-min cup & handle.
src=”https://tradingmarkets.com/media/2004/Hanna/rh021804-02.gif” />
Charts help to show the
emotions of market participants over different time frames. It doesn’t
matter what time frame you look at. The same setups can be used in any time
frame. In this example, we saw a cup & handle within a cup & handle.
You can use any setup you
feel comfortable with: Triangles, Head & Shoulders, High Tight Flags, Candlestick
patterns, anything. You can trade a Haggerty Slim Jim on a weekly chart, and
you can trade a Landry Bow Tie on a 5-minute chart. A chart is a chart. A setup
is a setup.
When I see a setup in a smaller timeframe trigger near a setup of a larger timeframe
I really pay attention. If the smaller timeframe trade works and triggers a
larger timeframe pattern, then it can really be explosive.
Best of luck with your trading,
Rob Hanna
robhanna@rcn.com