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On Topic: How to recognize a price breakout.
While trend lines are useful for helping one decide when to sell a stock, they are useless in trying to decide when or what to BUY.
That said, the question remains...what method can be used to help decide what and when to buy? One of the best methods is finding stocks that have "broken out" from a basing pattern. These stocks usually go on to make nice run ups in price.
A good example would be Kroger, from last summer to this spring.
chart4.bigcharts.com:80/chart?time=8&freq=1&uf=128&lf=1&type=2&style=1&size=2&comp=&r=chart&onbad=badsymbol&country=us&compidx=aaaaa%3A0&ma=0&maval=9&symb=KR&sid=2783&sec=c&xyz=51911250&s=28550
In this one year chart, notice first the 2 1/2 month flat line of resistance at $30 last summer, from mid July to early Oct. Several attempts were made that failed, falling back to the $27-28 area of support.
In late Sept, a sharp drop from $30 on high volume resulted in a rebound that finally propelled the stock over $30, where it then began to test support at $30-31 for most of Oct.
How does one attempt to trade this price breakout?
You could buy the stock as soon as it breaches the resistance of $30. But there's always the small chance that the price will fail to hold support, and then drop back. The safest strategy would be to watch the breakout, and the usual reaction back to the previous line of resistance. If the price holds, the time to buy would be on the low, in this case $30.
Sometimes a stock will not react back to the breakout line following the breakout. If the volume is very high, the momentum may carry the price so far away that it never comes back to test support at the old resistance level. In that case, you have to use your own judgement on whether to get into the stock, or wait for it to possibly fall back.
In any case, it's almost always recommended that buys be made on pullbacks to support rather than at highs, for the best results.
Trader X
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