Isn't it better to recommend a stock when it just starts to resume it's trend after a consolidation than on the breakout. Seems like most of the move is over when you buy after a breakout. (May 5, 2004)
Assuming that what you refer to is when a stock, while basing, moves up from the 'bottom' (consolidation) and begins to trend higher, forming the right side of the base. This occurs in patterns like a cup with handle, saucer, reverse head and shoulders, and even flat base when initially a stock reaches a high, falls off to lows in a 'bottom' consolidation then begins to rise again once many of the previous (and frustrated?) holders of the stock have sold off their shares. Volume will start building at this point as new buyers start to show up in more force, pushing the stock higher if all goes well, and the uptrend begins. This looks like a good time to buy, and there are times that we will move in at this point if we see something in the overall market we like or if the stock can give us a nice return simply by making the run up the right side of the base before it peaks out and forms a handle. Because the stock has the previous high at the start of the base to overcome, however, our preference is to wait until the stock actually breaks through that level. Why? This previous high is usually a strong resistance level: the stock will have to break through that remaining overhead supply before it can move higher. Until it does, we can't be sure that the move up the right side will continue on and out of the base.
We like to put our money into stocks that are making a breakout or continuing a breakout after a test as these are stocks that prove to us they have the strength to earn our investing dollars. For example, in a cup with handle pattern the stock traces out the cup, showing good price/volume action, gets close to the previous high when the last weak holders of the stock take their money and get out when it starts to stall and form the handle, getting out close to the breakeven point (the stock failed to move over the previous high in the base and starts to falter). The stock begins to fall back gradually into a handle, and this is where we begin to get interested, because if volume is falling off, it means that the last weak holders are selling off but most of those that bought in on the rise are holding onto it. Thus a breakout through the resistance may be imminent once the last sellers are gone. Once it makes the breakout on strong, above average volume, the stock has proven it's ready to post higher gains because it has finally overcome the resistance, having shaken out the last sellers throughout the formation of the entire pattern. The stock usually falls back, then, to test the breakout (buy or pivot) point, shaking out some short term profit-takers, then surges again as buyers keep it from falling below the pivot point. This one of our favorite entry points as it 'proves up' the base and the breakout, and usually starts a nice run up the 10 and 18 day EMA if the market stays solid.
Putting our money into stocks that are making or testing a breakout allows us to make bigger gains with fewer positions. We don't want to have a lot of our cash sitting in stocks are sitting below major resistance levels. Too, as a stock travels up the right side of its base there usually aren't clear patterns other than bounces off of support, and these tend to be riskier plays. We will play them if there is enough upside before the pattern indicates the stock will encounter that old overhead supply, but we prefer the less risky strategy of betting on breakouts from solid patterns; the stock has proven that it has shaken out the sellers. That is why we search for the best signature patterns that show technical merit and wait for them to reach the pivot point (the point just above the highest resistance in the base). Thus, we like to 'buy high' in a stock that is strong and moving out of a great pattern. For us that is a more sure way of making money.
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