Can you be more specific on when to buy and close positions?
Many patterns allow for a set buy target when the stock breaks out. Cup w/handle patterns, wedges, flying plateaus, and the like allow us to set a buy price that is just above the breakout point. That is easy. The hard part is volume. Breakouts on low volume usually fail. That is why we know what volume we want to see ahead of time and that is our target. It is usually 1.5 times the 50 day moving average of the volume. The trick is determining intraday if it is going to hit that level. We have covered this before, and it is in the FAQ’s, but in a nutshell, we know our target, and if the stock is moving above the breakout price, we do a quick calculation on the volume to see if it is on track to come close to our target if it continues to move the way it is showing us at the time. Volume is greater at the open and at the close, but this has worked for us more times than not. Sometimes we get in too early, but we just pull our stops up tight to avoid getting too far underwater.
The harder part of buying is when a stock has already broken out and is on the move. We hate to chase stocks after they breakout if they get 5% to 8% or so over the breakout price as they can pullback to test the breakout to some degree, and you could be underwater right away. We prefer to wait for the stock to do what a healthy stock does on a breakout: pull back on lower volume and then turn back up on rising volume. If we see a low volume pullback on a stock with good money flow, buying and relative strength, we are probably going to see it move back up after the initial round of profit taking after the breakout. We watch for that and move in. We cannot set specific price targets because we don’t know where it will turn back up.
One technique is to wait for the stock to break back above its breakout high before it started to correct back. That way you know that level is not going to act as resistance on the move back up. In that situation, you can set a buy order at a target just above the breakout high. Easy and simple. We like to catch them earlier and get the most out of the move we can. That is why we either look ourselves on stocks that are in low volume pullbacks, or we just tell our broker we are watching a low volume pullback and want to get in when it turns back up on better volume. A bit riskier, but if we like the other indicators, we are comfortable with that technique.
As for closing positions, that is up to each investor’s preference. The key to being successful in the market is to cut losses short and let profits run. Setting arbitrary exit points can lead to missed runs. If you are nervous about losing profit and don’t mind getting stopped out on a highly volatile day, set the stops at a point where you are comfortable with the profit you preserve. You can always get back in if the stock starts back up.
In summary, each day the market changes. While we can set targets for breakouts and where we want to buy, those plans can be scuttled when the market does something other than anticipated. Today is a classic example. After it sold down and found support at its trendline, it was a good time to take some positions on stocks that had been sold down and were just going to run back up. If you wait for a stock to get back $15, you may have missed a good run. It is safer, but you have to adjust to the conditions presented-there is no cookbook or else everyone would rack up huge gains. You have to keep your wits and know what you would do if a stock hits support or its 10 day moving average or 18 day moving average. We spell those prices out the best we can in the reports so you can note them on your favorite plays or stocks and be able to utilize that when the stock hits that level and bounces up.
