Introduction
Most of us are very familiar with candlestick charts which show the day high/low and closing. However, these intra-day highs and lows can create excessive noises and swings that may distort our technical analysis and buy entry level. In order to filter out such noises, a simple way is to change your charts to a linechart format, showing only the closing level of the counter. As the saying goes "the amateur opens the market while the pros closes the market", the closing price or the line chart is more representative of the real strength and weakness.
How to apply LineChart Breakout
Conventionally, we often use 52-weeks high price level to define the pivot point for a breakout. When a trader chases after the new 52-weeks high price level, he/she will be subjected to higher risk of false breakout, higher penalty of cut-loss and higher mental stress. To have a good head-start in identifying a potential breakout counter, we can plot a linechart to define a much lower pivot point for buy entry.
An example using Kepland:
- Kepland - Candlestick
The candlestick chart shows that the 52-weeks high is $3.00 while the current closing price is $2.85....so does it mean a trader must wait for 15 more bids and buy at $3.01 after $3.00 is cleared?
- KepLand - LineChart
The linechart shows that its peak is at $2.85 which is exactly the current closing price. In other words, Kepland is on the verge of a linechart breakout!
- Kepland - Breakout
The following day shows how Kepland open above $2.85 for a linechart breakout which in turn triggers a powerful 52-weeks high breakout on the same day.
So...How do we decide and prepare a buy entry for a line chart breakout?
(i) Base formation
A good base formation implies a good consolidation of storing energy for the next outburst of breakout. The longer timeframe the base takes, the stronger the pending breakout will be.
Take Kepland for example, it had been consolidating between $2.52~$2.85 during Aug to Nov 2009...Whenever it starts to drift near to the 2.85 resistance level in the linechart, we should monitor closely if it is able to close higher than $2.85 on the following day. If it is able to close above the peak of the linechart, it will have a linechart breakout from its base.
(ii) Number of times touching the linechart peak
The higher the number of peaks at the same price level, the more powerful a successful breakout will be.
Take Kepland as example, it had at least 4 peaks at $2.85 level, implying that $2.85 is the important pivot point to look at. When the time is ripe and the strength is right, a successful closing above this level will occur and translate into a strong breakout.
(iii) Intra-day Performance near the line chart peak
During the stock screening in your charting software, screen out any counter which starts to drift near to its line chart peak. Include this counter in your watchlist to monitor closely in the following day. If the counter has a high chance to close above the line chart peak, you can start making your first buy entry. Normally by lunchtime or by 4pm, you should be able to assess whether the counter has the ability and strength to close above the line chart peak.
(iv) Volume Activity
In most technical analysis, volume is a very important indication to understand the buying interest and bullishness of a counter. In most cases, there is a huge sell queue block at the pivot point or one bid higher than pivot point. If this sell queue block is cleared with high volume, there is a high chance for this counter to close above this pivot point or the line chart peak on that day. When this pivot point clearance occurs, it could be an early signal for you to make the first entry.
One more example using HoBee:
- HoBee - Breakout
Notice how HoBee forms a nice base between $1.30~$1.57 from Sept to Dec 2009. A higher close above $1.57 trigger a linechart breakout as well as a powerful 52-weeks high breakout.
Line Chart breakout can also apply on illiquid counters, which often have wild daily swings.
An example is Creative:
- Creative - Candlestick
In this candlestick chart, a nice base is formed well below its 52-weeks high although there are wild daily price movements due to its illiquid nature.
- Creative - LineChart
A linechart peak of $6.10 presents the resistance level to its base from Oct to Dec 2009...
A successful linechart breakout above $6.10 induces a rally towards the next higher linechart peak at $6.54...This higher linechart peak at $6.54 becomes the new resistance level. Hence, higher linechart peaks can be a good hint for your targeted exit price.
LineChart breakout strategy can also apply on penny/small cap counters
An example is CNA:
- CNA - LineChart
A linechart breakout above $0.37 recent peak gives a rally towards its next higher linechart peak at $0.42, which imposes the next resistance levels. So far, most of linechart breakouts are unable to clear 2 consecutive linechart peaks at one go. Some resting and consolidation phase usually takes place when the higher peak is reached.
Based on my personal real $$ "experimentations" on big caps, mid caps, small caps and pennies for the past 3 months, this linechart breakout strategy works best for big caps and mid caps counters. Small caps and pennies are more prone to churning and volatile short-term traders, which require more trading experiences and attention to differentiate between a real or false breakout.
Here is some homework for you to apply this strategy:
- DiaryFarm - Candlestick
Can you pinpoint the best entry level and the targeted exit price for this counter?
