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.