How to Spot a Breakout and Get in on Profits
A look at recent breakout trades and potential set ups for the coming weeks.
This service is for general informational and educational purposes only and is not intended to constitute legal, tax, accounting or investment advice. These are my opinions and observations only. I am not a financial advisor.
A lot of great action and stocks breaking out of recent ranges means big opportunities to make money. There is no doubt more to come.
Taking advantage of a breakout is what we are looking at this week.
Normally I trade ranges, selling covered calls at the top of the range and accumulating shares at the bottom. Now it is time to look at what happens when the range breaks.
First, a big happy Father’s Day to all of you out there doing the Dad thing for your kids. I hope you have an amazing day!
Also, I’d like to share that this week I learned how to build and program bots for discord which means what I’m building is going to be that much better!
It also means I’m slightly delayed. Add to the delay, a trip to the World Series of Poker and the discord room won’t launch until after the July 4th holiday.
Stay tuned! It is going to be unlike any other services out there.
Ok, another week of charts to learn from and then a potential trade. Let’s get to it!
Do we Have a Breakout or Not?
Using the 4-hour candles for SPY, there is a clear channel that formed but there were also a couple of “fakeout breakouts” that happened before the real thing.
How do you avoid the fakeouts?
You look for changes in strength and avoid having a bias. It is that simple.
Take a look at this SPY chart and notice that after each fakeout the candles retreated all the way back to the bottom of the range that was identified.
The retest of the lows followed each failed attempt to break out of the range. But then something changed.
A third attempt to move higher met resistance in May and pulled back yet again, but this time only to the middle of the range before rocketing back higher.
This is the first sign that something might be different.
Next, the shares pushed up again and created a higher high which was the buy signal. There was enough information provided to go long with confidence.
Yes the shares pulled back a little, this would be the ideal position to buy with the 50-SMA support sliding in near $420 and the market took off from there closing just below $440 on Friday.
To recap, the signals for a breakout were all there:
Range defined and patterns formed
Failed breakouts were followed by a retest of the lows
A third failed attempt did NOT retest the lows, signaling strength
The next move up created a higher high well above the prior range, signaling the breakout
This pattern works to the downside as well. You may see failed attempts to sell off followed by a show of added weakness just before the breakdown.
Identifying these patterns early is key to generating outsized returns.
Gettting back to more upside trading, because we are still in a market that is trending up! Taking a look at NVDA, we see the same set up that we had with SPY.
The same pattern of retesting the lows after testing the highs started the range.
This was followed by a show of strength when the latest retest of the upper end of the channel did not reject back to the bottom of the range.
Instead it held at the midpoint and moved back up. After this display and after seeing the candles breaking above the $395 resistance level, it is clear that a breakout is underway.
Potential Breakout Opportunitites
While MARA has been printing money by trading in a range for months while offering nice premiums for collecting cash, we could see it pick a direction.
Shares closed just below $10 and started to reverse to close out last week. If this reversal continues but then stops near the midpoint of the channel, we could see a similar set up to the SPY and NVDA examples.
I’m watching MARA closely to see if $9.46 holds up. If that happens, the next signal would be a break above $10.75 on strong volume. That would be the set up for a big breakout.
If the candles follow this pattern for MARA, the bulls target $11 and $11.50 next.
Another potential breakout candidate is IWM.
I’ve already highlighted the initial move up from its consolidation range. Now it is forming another channel to trade off of.
I’m watching the hourly candles for a retest of $188 with a pullback that does not retrace back to $184.80 but instead holds up around $186 and bounces back.
That is the set up I’d like to see to retake $188 with strength and break out to new recent highs targeting $191.50 and $194.52 next.
Best of luck this week! I hope this information on trading breakouts has been helpful.
If you would like to hear and see more, be sure to check out The Trading Triangle on YouTube where I host chart reviews and trading analysis every Sunday.
Live on YouTube! Chart Review Sessions
If you are looking to sharpen your chart analysis skills further while hearing about what traders are looking at for possible trade ideas, be sure to also tune into A Trader’s Education podcast.
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You will still also be able to find recordings of the stream on the A Trader’s Education podcast, which you can find on both iTunes and Spotify.
It is packed with value and always an all around great time!
Shaun Clarke - @ShaunClarke_ and Kaye @InvestKaye join me every week. You don’t want to miss it!
Thank you again for reading and have a great week!
Nate