I would like to know when do you know what the breakout point is, and at what point do you buy. (February 4, 2002)
When we refer to a breakout, we are talking about a stock price exceeding a certain level within a chart pattern. The pivot point is another term for the breakout point. That is the point we want to buy.
When a stock forms a technical pattern such as a cup, it "breaks out" of the pattern when it exceeds the prior high. The "pivot point" is the buy point, and it is $0.10 above the former high. The reason the pivot is $0.10 higher is because the former high serves as resistance, and we need to see that the stock price clears that former level before we buy into it. Now, we prefer cups that form handles before they breakout. That is when, before it reaches the former high before it started its correction, it pulls gradually back in a flat, slightly declining consolidation on low volume. This action 'shakes out' weak holders who bought near the former pattern high and are just looking to get out as close to even as they can. They see it approach the old high, fail to take it out, and then start to fade again. They want out. When a pattern forms a handle, the pivot point is $0.10 above the high in the handle (the intraday high, not the closing high).
With a double bottom pattern, the pivot point is $0.10 above the center of the pattern. Double bottoms can also form handles, and the rule for handles as set forth above applies. For other patterns, such as ascending wedges, we stick with the pivot point being $0.10 above the former high in the pattern.
Volume is a key factor in breakouts. In a breakout from a cup with handle or double bottom with handle, we look for volume of 1.5 times the daily average. For an ascending wedge, as a rule of thumb we can make the play with volume of 1.35 times the average volume.
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