How many times have you heard that a stock is “breaking out”? Seems like every time a stock moves higher it is “breaking out.” Breaking out of WHAT? Defining a “breakout” first calls for clarification of an equally important but less used and understood term - “pivot.”
Definition
Webster’s defines “pivot” as:
2. Axis consisting of a short shaft that supports something that turns.
So, a turning point. Where a stock is likely to turn and change direction. That’s the expected behavior because that’s what it’s done in the past. If, on the other hand, the stock continues to move in the same direction (up or down) on higher volume - something new and unexpected has happened that is causing it to change its behavior. The stock is now “breaking out” of the previously established trading range. Old rules of trading it “in the range” no longer apply.
Calculating pivots
Some people want to see a stock take out the 52-week high. Others add 10c. to a previous high - wherever that is. Yet others follow IBD rules for cup with handle. There is no magic formula. In broadest terms, a breakout occurs when a stock penetrates resistance. The greater the resistance, the more significant the penetration.
In a breakout, a stock can:
a) zoom past resistance and never look back;
b) gap up;
c) struggle; or
d) rise for a while and fail, falling back into the base.
In some instances a pivot is just a specific point, in others it’s an area that may take several days to complete as bulls and bears duke it out. It all depends on the stock, market conditions, analyst coverage, public sentiment, etc.
True pivots
The key to remember is that true pivots are few and far apart - certainly not more than a couple a year. It’s true that for a stock to double and then triple it first has to take out the old high and then keep on making new highs. But successive new highs carry less resistance and therefore are less significant in the big scheme of things.
A valid breakout needs above average volume. A stock rising on low volume produces the same amount of gain, but if you multiply the share price by the number of shares traded you get a better picture of the dollar amount of somebody’s commitment and their willingness to defend the position.
Since true breakouts are significant but rare, investors can achieve much better results by recognizing and acting on them early as opposed to simply buying successive new highs half way through the advance.
Slav Fedorov is a full time stock trader and founder and managing member of TradingZoom, LLC - a provider of proprietary trading data that swing traders can put to work right away.
http://www.tradingzoom.com/
Article Source: http://EzineArticles.com/?expert=Slav_Fedorov
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