When Breakouts Fail, Try This

  • June 23, 2004
  • Rob Hanna

The
S&P 500 and Dow both poked above their recent ranges today (Nasdaq
just missed) as buying came into the market along with some decent volume.  What
will be key now is to see if a momentum move can emerge.  Will the market
continue to follow through on its gains or quickly dip back into its recent
range?  Don’t just watch the major averages.  Watch individual stocks as well.

Lately I’ve been mentioning how
follow through has been poor on many individual breakouts.  Today I’d like to
show you a few charts to illustrate this point.

Below is a chart of FDRY from
last year.  After forming a nice base, FDRY broke out at the end of April.  It
never retouched it’s pivot point and within 4 days was trading up over 20%. 
FDRY actually continued this run for a while longer before topping out in the
beginning of 2004 at around $36.


When the market is trending
strongly as it was last year, breakouts with strong follow-through such as FDRY
are numerous.  Breakouts at this time are not showing the same enthusiasm. 

JUPM is an example of a recent
“breakout” that illustrates what I’m seeing from many stocks these days.


JUPM broke through it’s handle on 6/16 on decent volume.  Over the next three
days, rather than continuing to move higher, it pulled back.  On 6/21 it
actually dipped below it’s pivot point.  That pullback also set up as a 2nd
handle.  Yesterday JUPM broke out of that handle but could manage to close above
it.  Today JUPM gapped above the entire base but still couldn’t attract momentum
players and closed below its open and close to its recent handle high.

Like FDRY, the best breakouts
frequently are successful right away.  They look like a circus clown being shot
out of a cannon.  For the last several months, rather than looking like circus
clowns, breakouts have looked more like a clown fish emerging from their
anemones.  Very timid.  Out and back several times before deciding to go
anywhere. 

 


When “breakouts” look like
this, sometimes it’s better to focus on pullbacks.  Pullbacks can frequently be
bought with tighter risk.  When stocks start running up sharply before offering
a pullback opportunity (see FDRY), then you’ll know breakouts are starting to
pay off again.  If the indices can follow through and volume patterns can
continue to act positive, this may happen sooner than later.

Good trading,

Rob


robhanna@comcast.net