Jump to content

Welcome to the new Traders Laboratory! Please bear with us as we finish the migration over the next few days. If you find any issues, want to leave feedback, get in touch with us, or offer suggestions please post to the Support forum here.

  • Welcome Guests

    Welcome. You are currently viewing the forum as a guest which does not give you access to all the great features at Traders Laboratory such as interacting with members, access to all forums, downloading attachments, and eligibility to win free giveaways. Registration is fast, simple and absolutely free. Create a FREE Traders Laboratory account here.

morpheustrading

How To Find Chart Patterns That Precede The Best Stock Breakouts

Recommended Posts

Stock breakouts are about more than simply buying stocks that are trading at new highs. In order for a breakout to be valid and without a high risk of failure, a stock must first possess a valid base of consolidation on its chart pattern.

 

In this educational article, we clearly show you how to spot two “basing” chart patterns that precede the best breakouts: Deep Correction (Cup and Handle) and Shallow Correction (Flat Base).

 

We suggest studying these chart patterns closely, as it will enable you to develop your eye and eventually read stock charts like a pro.

 

Deep Correction – “Cup And Handle” Type Pattern

 

Following are the technical characteristics of a deep correction, along with an actual visual example.

 

*The pattern must form within an existing uptrend, and stock must be at least 30-40% off the lows. This rule is very important. Do not go looking for cup and handle patterns with stocks trading at or near 52-week lows! The best cup and handle patterns form near 52-week highs. Stocks that are breaking out to new all time highs are ideal because they lack overhead resistance.

 

*The 50-day moving average should be above the 200-day moving average, and the 200-day moving average should have already been trending higher for at least a few months.

The base typically forms on a pullback of 20-35% off the highs, and is at least seven weeks in length.

 

*As the base rounds out and the price returns back above the 50-day moving average and holds, be on the lookout for the “handle” to form. The handle usually forms 5-10% below the highs of the left side of the pattern.

 

*The handle itself should drift lower, and is typically 5-10% or so in width. Handles that retrace more than 15% are too volatile and prone to failure.

 

*Handles should be at least 5 days in length and not form below the 50-day moving average.

 

Putting it all together, this chart of LinkedIn ($LNKD) shows a valid cup and handle type pattern, based on the technical criteria above:

 

LNKD.png

 

On the chart above, notice the 200-day moving average (orange line) is in a clear uptrend. The 50-day moving average (teal line) is above the 200-day moving average, and the 20-day exponential moving average has crossed above the 50-day moving average.

 

When the 20-day exponential moving average is above the 50-day moving average, and the price action is above both averages, it is the ideal time for a handle to form.

 

The key to the handle is that price action should drift lower to shake out the “weak hands.”

 

The buy point for this type of swing trade setup is a breakout above the high of the handle. However, over the years, we have learned to establish partial position size at or near the lows of a handle, and add to the position on the breakout above the high of the handle. This enables us to lower our average cost and provides a better reward to risk ratio.

 

Shallow Correction – Flat Base

 

A shallow correction is also known as a flat base, and the pattern should possess the following characteristics:

 

*As with the cup and handle type pattern, a flat base must form within an existing uptrend. Typically, it will form after a breakout from a deeper correction (like a cup and handle base).

 

*The best way to identify a flat base is by using the weekly chart timeframe. The majority of the base should form above the rising 10-week moving average (or 50-day moving average on daily chart).

 

*The 10-week moving average should be trading well above the 40-week moving average

 

*A flat base should be at least 5 weeks in length.

 

*Flat bases usually correct no more than 15% off the highs

 

The following chart of Pharmacyclics ($PCYC) illustrates what a flat base should look like:

 

PCYC.png

 

Although the weekly chart above is a great example of a flat base, the pullback was just a bit over 15% at 17%. A flat base should form around 10-15% off the highs, but 16-18% is okay, especially if the stock is volatile. If the pattern is 25% wide, it is probably not a flat base. Please just use common sense with these rules.

 

Also on the chart of $PCYC, notice the entire base finds support at the rising 10-week moving average, which is a very bullish sign. Further, the 10-week moving average is well above the 40-week moving average, and both indicators are in a clear uptrend.

 

The buy point of a flat base is on a breakout above the highs of the pattern. As with cup and handle patterns, we usually try to establish partial size before the breakout if possible.

 

Keep It Tight!

 

When finding bullish stocks patterns, it is crucial to look for a tightening of the price action on the right hand side of the base.

 

The left hand side is the initial drop off the highs, where the price action cracks and becomes wide and loose. For the first few weeks, the price action is volatile and there can be quite a bit of selling. But after a few weeks of bottoming action, the stock begins to settle down and push higher.

 

When the majority of price action is above the 50-day moving average, and the 20-day exponential moving average is above the 50-day moving average, this is when the stock should begin to tighten up.

 

The following daily chart of Tesaro ($TSRO) clearly shows a tightening of the right hand side of the basing pattern:

 

TSRO.png

 

On the chart above, the initial decline off the highs (around $20) produced volatile price action for several weeks. However, notice the price action never really broke below the 50-day moving average for more than a few days.

 

In early January 2013, the price action tightened up. By later in the same month, an extremely tight range develops above the 20-day exponential moving average. This is a classic snapshot of tightening price action, which is something we always look for.

 

The rules above may be rather precise, but the details are worth studying and memorizing because they have been developed through years and years of experience. Since the most profitable stock picks in our swing trading newsletter nearly always possess the above qualities, the proverbial proof is in the pudding.

Share this post


Link to post
Share on other sites

Join the conversation

You can post now and register later. If you have an account, sign in now to post with your account.
Note: Your post will require moderator approval before it will be visible.

Guest
Reply to this topic...

×   Pasted as rich text.   Paste as plain text instead

  Only 75 emoji are allowed.

×   Your link has been automatically embedded.   Display as a link instead

×   Your previous content has been restored.   Clear editor

×   You cannot paste images directly. Upload or insert images from URL.


  • Similar Content

    • By adamal7
      Hello guys,
      I'm starting to swing trade commodities, especially soft commodities (corn, sugar, coffee, cotton, soybean, ...). I'm also checking gold and oil.
      My problem is I'd like to know what is the best broker for trading those markets (regulated, large commodity choice) ? For CFD trading.
      I'm thinking of IC MARKETS who are very good with forex and have good trading conditions.
      The concern I have is that I need a broker that offers MT4 as a platform, and also I'd like to be able to open mini lots positions for a better risk management.
      As a swing trader, I'm less concerned by the spread but looking at the financing fees.
      Wish you have a nice day, and thanks in advance.
      Alexandre.
    • By trading4life
      Hello, My name is trading4life.
      I just joined this forum.
  • Topics

  • Posts

    • EURJPY Weakens On Price Sell-off With Eyes On 123.65 Zone EURJPY weakens on price sell-off following as it holds on its nearer term bear pressure. Support comes in at the 124.00 level where a break if seen will aim at the 123.50 level. A cut through here will turn focus to the 123.00 level and possibly lower towards the 122.50 level. Its daily RSI is bearish and pointing lower suggesting further weakness. On the upside, resistance resides at the 124.50 level. Further out, we envisage a possible move towards the 125.00 level. Further out, resistance resides at the 125.50 level with a turn above here aiming at the 126.00 level. On the whole, EURJPY retains downside nearer term.  
    • $WDAY (WDAY) Workday stock narrow range breakout watch above 199.31,analysis https://stockconsultant.com/?WDAY
    • Date : 25th April 2019. MACRO EVENTS & NEWS OF 25th April 2019.FX News Today The BoJ left rates unchanged, but clarified its forward guidance, saying it will keep rates very low at least through spring of next year. Also, they will expand the eligible collateral and also consider the introduction of an Exchange-Traded Fund (ETF) lending facility, that would allow to temporarily lend ETFs that the Bank holds to market participants. Japanese stock markets outperformed going into the announcement, but mainland China indices were under pressure. Stock futures are moving higher in Europe and the US. The weaker than expected Ifo reading yesterday and a negative GDP print from South Korea overnight added to concerns about the outlook for world growth, which means rates will stay low for longer. The Swedish Riksbank is widely expected to keep monetary policy on hold today. The front end WTI future is trading at USD 65.91 per barrel. Charts of the Day   Technician’s Corner USDCHF is consolidating since last night within 1.01970-1.02190 range. However, the pair still holds above 1.0200, suggesting the continuation of the uptrend, as the pair remains well above the medium term Support at 1.0123 level (6 month Resistance converted to Support). Intraday, however, and as momentum indicators have been flattened, consolidation mode could possibly hold within the day. A cross below 1.0200 could retest yesterday’s lows. AUDUSD within the strong 3-year Support, 0.7000-0.7020. It could react as a retracement level for the asset. However, the 3 black crows in the daily chart suggest that negative bias is increasing for AUDUSD. Main Macro Events Today Durable Goods (USD, GMT 12:30) – March durable goods orders are expected to rise 0.2%, following a 1.6% February decline. Shipments are expected to fall 1.5% in March, after a 0.2% reading in February. NZ Trade Balance (NZD, GMT 22:45) – The trade report is expected to show an improvement in the surplus to NZ$300 mln in March from NZ$12 mln in February. Tokyo CPI and Production Data (JPY, GMT 23:30) – The country’s main leading indicator of inflation is expected to have remained at 1.1% y/y in April. Industrial Production is expected to have improved, growing by 0.6% m/m in March, compared to -1.1% m/m in February, while Retail Sales are expected to have increased by 1.2% y/y, compared to 0.6% in March. Support and Resistance  Always trade with strict risk management. Your capital is the single most important aspect of your trading business.Please note that times displayed based on local time zone and are from time of writing this report.Click HERE to access the full HotForex Economic calendar.Want to learn to trade and analyse the markets? Join our webinars and get analysis and trading ideas combined with better understanding on how markets work. Click HERE to register for FREE!Click HERE to READ more Market news. Andria Pichidi Market Analyst HotForex Disclaimer: This material is provided as a general marketing communication for information purposes only and does not constitute an independent investment research. Nothing in this communication contains, or should be considered as containing, an investment advice or an investment recommendation or a solicitation for the purpose of buying or selling of any financial instrument. All information provided is gathered from reputable sources and any information containing an indication of past performance is not a guarantee or reliable indicator of future performance. Users acknowledge that any investment in FX and CFDs products is characterized by a certain degree of uncertainty and that any investment of this nature involves a high level of risk for which the users are solely responsible and liable. We assume no liability for any loss arising from any investment made based on the information provided in this communication. This communication must not be reproduced or further distributed without our prior written permission.
    • Great News: - starting from today minimum deposit is ONLY 10$ (use ENTER10 code) - Deposit using Cryptocurrencies or Fiat Money (12 Cryptocurrencies + Credit / Debit Cards, Bank Transfer & Many eWallets options) 50$ No Deposit Bonus STILL Available & Daily 250$ Free Entry Trading Tournament USA Customers Welcome https://binaryoptionsprofits.eu/review/pocket-option/ Make up to 128% Profit / Trade Every 60 Seconds!
    • $SPY (SPY) S&P 500 ETF top of range breakout watch above 294.92,analysis https://stockconsultant.com/?SPY
×
×
  • Create New...

Important Information

By using this site, you agree to our Terms of Use.