Which Is Better: Tight Or Loose Base Formations?
The
market tried to rally this morning but it turned into a fizzle by the end of the
day. High oil prices were taking the blame on tv. The “why†doesn’t
matter much to me. What matters is that the market is losing momentum. So far,
though, no real damage. Therefore, I would continue to focus on the long side.
 I’m still seeing a good amount of setups out there along with some successes.
I recently had an email from
someone who wanted to know what I thought of the merits of tight vs. loose base
formations. Most breakout traders tend to favor tight basing formations, yet
I’ve never found them to have an advantage from a success rate or explosiveness
standpoint. To me it’s like asking, would you rather buy a Cup and Handle or
Double Bottom? Doesn’t matter. What does matter is that the trade may be
entered with reasonable risk. The reason so many traders prefer tight basing
patterns or tight handles is that it makes it easier to control your risk if you
are able to use a relatively tight stop below the handle or bottom of the base.Â
Traders who have been reading this column for a while should understand that
there are many ways to enter a breakout, beyond just trying to buy when the
stock hits a new high
Early entries, intraday support
stops, and waiting for a 1st pullback are some of the techniques I’ve
discussed and will continue to discuss that can help you to control your risk.Â
When using these types of techniques, you will not need to be nearly as
concerned about whether the basing formation is loose or tight. Loose bases can
be just as explosive and rewarding as tight ones – the trick is being able to
manage your risk properly.
Sector Watch
Technology, especially internet
has pulled back the most in the last week. Should the market decide to rally,
this area may have the most snap-back power.
Energy seems to be getting a
bit overdone. I’d be looking to take some off the table here. IYE has now made
higher highs 11 days in a row, and IGE 9 days in a row. Probably about time for
a break.
Best of luck with your trading,
Rob
P.S.
Click here for the Hanna ETF Money Flow System.