Thursday, March 11, 2010

Identifying Breakout Moves in the Stock Market

The midday briefing noted the bunching of volume in a narrow price range and alerted to the possibility of a breakout trade. Indeed, extreme narrowing of trading ranges is one thing we look for in anticipating a breakout. This often shows up as very low Demand and Supply scores, indicating that few stocks are closing above or below the volatility envelopes surrounding their moving averages. (Demand and Supply are updated each morning before the open via Twitter).

Above we can see how the breakout trade did indeed materialize late this afternoon. Note the expansion of volume on the break above the day's trading range (bottom arrow). That indicates that institutional participants are accepting new, higher levels of value for the market. We also see volatility expanding in the direction of trade, as the move is both a price and a volatility breakout. (This latter is an important concept).

We also can identify valid breakout moves by the extent of participation in the move. When we see the great majority of individual stocks and stock sectors making fresh daily highs--and when we see a meaningful expansion of the intraday advance/decline line--that tells us that there is broad participation in the move.

All of these factors--for range days as well as breakout ones--can be distilled into checklists that help you stay oriented to evolving day structures.



Marc said...

Good morning

You wrote you will let a record of your just past webinar on the site !

Is it done and did I miss the information ?

Thanks to you for your site

Bob said...

I would like to quibble about something you(and many others) have stated:
"Note the expansion of volume on the break above the day's trading range"

Shouldn't we also expect an expansion of volume when value/counter-trend traders step in and offer liquidity to momentum traders, reversing price?

What I mean is, I don't know of any evidence that volume is predictive of trend continuation. Please fill me in if you're aware of something convincing that I'm not!

p.s. this is my 3ed comment, it'd be great to hear back from you.

Brett Steenbarger, Ph.D. said...

Hi Bob,

I agree; it's the combination of volume/volatility expansion and the bias of volume lifting offers vs hitting bids that alerts us to the valid breakout. It's important to watch where the volume is transacting and whether that volume is expanding or contracting; whether the volume is one-sided (at offer or bid) or two-sided.


Bob said...

Thanks for the comment Bret, what you said makes sense.

The strategy you described can be classified as an information-less order anticipation strategy. Some people would consider it parasitic trading because the results of this strategy is to magnify price moves; even if uninformed traders caused the original signal and prices are being driven away from fundamental value.

Ben said...

What is the symbol that shows the amount of new daily highs to lows, NYSE and all markets.


Brett Steenbarger, Ph.D. said...

Hi Ben,

I gather that information from the and Decision Point sites, not from a charting/data service.