One to watch

December 27, 20128 Comments

If I had to choose a single pattern that represents some of the most accurate trading signals, it would probably be a breakout from a long, narrow sideways consolidation pattern. Rectangles that have contained a security within a narrow range tend to be followed by explosive movements to the upside – if, and only if, the top of that range is taken out. Conversely, downside breakouts from a long rectangle can be quite bearish. I mention two ways to trade rectangles in my book, Sideways, but upside breakouts are by and far the most rewarding of the two. FYI: the other method to trade these patterns is to buy the bottom, and sell the top with coinciding stochastics or RSI signals. Read the book for more details.

When viewing a rectangle breakout, look for at least 3 days and about a 2-3% price increase from the breakout point – along with supportive volume spikes to confirm the movement. If the breakout is legitimate, the movement can be very rewarding for the players on the right side of the trade.

Right now, I’m watching coal – which is well into a very long rectangular consolidation. Check the nice long consolidation pattern on the Market Vectors Coal ETF (KOL) above, which has recently taken out the down trend. If coal breaks out to the upside under the conditions mentioned above, this could be a very big mover. Watch for a breakout through about $26/share (a catalyst such as positive economic news coming out of China might inspire such a move) to drive KOL up out of its sideways trading range. While there is always potential for a downside breakout through $22/share, the fact that KOL has broken its downtrend hints that any eventual breakout might be a bullish one. This one, while not yet ready to buy, deserves a place on a traders watch list.

8 Comments

  • WLT is my way of playing coal, understand the movement better since I`ve lost money on it this year. Lesson learned 🙂

    Reply
  • Many times price will break out and then retest the breakout point. That is my preferred buy point. In this case KOL could break above 26 and then come back to 26 before it moves higher. It happens in many cases, because the immediate break out causes a short term overbought condition.

    Reply
    • Absolutely true-this is my favorite technique on such a breakout as well–the “test of the neckline” as I like to call it.

      Reply
  • Great blog Keith, I’ve learned a lot here, and I just finished your book Sideways.

    On KOL, or something similar, could you just put a buy stop, say 3.5% higher than the breakout, so in this case 26.91 and let the stock come to you?

    Is there more risk in this scenario?

    Thanks

    Reply
    • I dont use physical buy-stops–instead, look for the breakout and then manually try to place the trade–also, note that often after the 3% + breakout, there is a pullback “test” of the neckline breakout – thus, the buy point may come in that pullback to the neckline.

      Reply
  • DOW THEORY BEARISH SETUP?

    1-) FAILURE OF THE NYSE ADVANCE/DECLINE LINE TO HOLD ABOVE THE BREAKOUT OF EARLY DECEMBER .

    2-)BEARISH SETUP OF A PENDING DOW THEORY “SELL” SIGNAL:

    A-) IN OCTOBER 2012, NEW HIGHS BY THE INDUSTRIALS (13600) AND FAILURE OF THE DOW TRANSPORTS TO CONFIRM.

    B-)WHILE WE HAVE THE SETUP FOR A NEGATIVE DIVERGENCE CONDITION WE STILL NEED THE TWO AVERAGES TO CONFIRM THE “SELL” SIGNAL BY SUBSEQUENTLY DROPPING BELOW THE LOWS AT 12400 (DJIA) AND 4850(DJT).

    SOURCE: “GETTING TECHNICAL” WEB SITE WITH BILL CARRIGAN.

    Reply
    • That setup is in place, but in the nearterm, all will be driven by the “Clff” outcome

      Reply

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