Looking for a better breakout strategy? Try this...

Not much to say about the market today. Volatility has contracted greatly the last few days. With the Fed meeting concluding tomorrow and end of quarter on Friday, I would expect to see a bit more action coming soon. On a short-term basis I’m not seeing a big edge either long or short. On an intermediate-term basis, I be giving my end-of-month overview on Wednesday, so I’ll talk in detail about what I’m seeing then.

One issue many traders face when looking to buy breakouts is how to handle stocks that are extended on an intraday basis. In other words, the daily or weekly chart may be breaking out, but the 5-min or 15-min chart appears extended and primed for a pullback. Do you just jump in, or do you wait for a pullback and risk having the price completely run away? While there is no true correct answer, the best breakouts will offer more than one opportunity for entry. Let’s look at an example from today:

Neoware (NWRE | Quote | Chart | News | PowerRating) had been basing for nearly two months and put in a nice, low-volume handle last week. It broke out nicely above that handle today.



On an intraday chart you can see that the stock had already run up about 4% in the 5 or 10 minutes preceding the breakout. If this caused you to hesitate and miss the entry (or if you were away from your desk and missed it), a second opportunity could have easily been taken by closely monitoring the intraday action - in this case, a breakout of the consolidation between $28.14 and $28.44.



When entering based on an intraday pattern like this consolidation breakout, you should also set your initial stops based upon that pattern. If you used a stop below the consolidation you’d only be risking $0.30 or $0.40. This means a somewhat larger position could be considered than you may have been considering with the intermediate-term stop. After the position moves in your favor, you could then take profits on a portion of your shares and use the remaining as an intermediate-term position. The profits taken on the short-term portion will then help to reduce the cost of the intermediate-term position.

Best of luck with your trading,

Rob
RobHanna@comcast.net

For those who may be looking to expand their knowledge beyond just market timing, my Hanna ETF Money Flow System utilizes the VIX in generating trading signals for spread trades.

Rob Hanna is the principal of a money management firm located in Massachusetts. He has spent the last several years developing and refining methods for trading in stocks across multiple time frames. He selects stocks using both fundamental and technical criteria, and then trades them using technical analysis techniques.