How to Find Better Breakouts
If you’re looking at only one price chart, you’re ignoring important catalysts that could lead to bigger and more consistent breakout plays.
Today, I’m going to show how you can select better breakouts by using charts from multiple time frames. Weekly, daily and even hourly charts all offer very different looks. But if you learn how to spot consistencies across separate time frames, you will have the potential to exploit better breakout stocks.
Before I get into the details, I want to briefly discuss the performance of breakouts and how they have been affected by current market conditions. This is something I’ve been talking about a lot recently — mainly because we’ve seen little follow-through in this market. After what appears to be a routine breakout, we’re seeing little to no continuation. Or worse yet, a stock quickly breaks out, but instead of holding onto its gains, the whipsawing stock abruptly reverses.
Traders will sometimes call this a “hit and run” market, with so many skittish traders bailing out of a stock at the first hint of selling pressure — sending shares back below the newly broken resistance zone.
Obviously, whipsaws and other failed breakouts can be extremely frustrating for traders. That’s why I want to talk about multiple time frames today. The market is bouncing off support this week, giving you the perfect opportunity to look for new trades on the long side.
That’s where charts showing different time frames come in…
Take a look at this recent breakout:
Here we have a daily chart of AmerisourceBergen Corp. (NYSE:ABC). The stock has just broken out of a sloppy inverse head and shoulders pattern with resistance right on $40. So far, ABC is showing a clean breakout, with a slight retracement today.
But what about a much longer time frame? Take a look at this same stock’s weekly chart:
Now we’re beginning to get a better idea where different resistance levels might come into play. As you can see, even after its breakout on the daily price chart, ABC is still a couple of dollars from posting new 52-week highs. Another key resistance area might affect trading near $42. That’s not necessarily a bad thing. However, shares might need more time to consolidate below $42 before making new multiyear highs. If that consolidation area needs space below the shorter-term $40 breakout, it could be a while before your trade sees meaningful follow-through to higher prices…
Here are a few tips to remember on your search for better breakouts using different time frames:
When you’re looking for stocks to trade, breakouts on two or more different time frames are ideal. If a stock is breaking out on a weekly and a daily chart, you should put it at the top of your list. Of course, normal trading rules still apply. There are no guarantees — no matter how strong a setup might initially appear.
Next, you should always pick time frames that will help your personal trading goals. Unless you are a day trader looking to hold a trade for a couple of hours or less, there’s really no reason to mess around with one-minute charts. Likewise, a 10-year view of a stock will probably not be very helpful to a short-term swing trader.
Finally, don’t be afraid to experiment with unusual settings on your charts. Every once and a while, it’s good to take a peek at a monthly chart — or even a two-hour chart. These can give you different perspectives that many other traders simply ignore. Maybe you’ll see an interesting setup that everyone else misses…
Remember, always make a plan before you trade. If you take an extra couple of minutes to study a couple of different time frames, you might see something you missed the first time around.
Greg Guenthner, CMT
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