Securities Research Services

Monday, December 19, 2011

Breakout Stock Entry Point

The following article is an oldy, but a goody.

In the article below, we discuss ways to get the best entry points, but do not discuss how to choose a breakout to trade. Go here for a great article on trading breakouts

Getting the best entry point seems to be one of the top issues for subscribers so today we are providing another strategy that often works to help find the best entry point when opening a trade.

When a stock breaks out, very often it will return to the point where it broke out from before it moves higher.  Take this week’s recommendation IVAN for example.

IVAN was trading in a descending triangle pattern until last week when it broke out from the corrective trend it was in:

The breakout point is highlighted in yellow.  The price, in line with the majority of breakouts, then proceeded to correct, pulling back toward the point of breakout.  From this daily view it is not possible to see where the retracement, which occurred after the breakout, stopped making it hard to know where to enter the stock.  The 15-min chart provides a micro view of this stock’s activity and makes it easier to see when the selling has stopped making it safe to enter.

Let’s analyze the above chart.

Monday:  The report recommended IVAN on this day with the following recommendation:

$2.70-2.80 is major support.  This area has held more than three times over the past few months so we expect it to be very strong here.  It is likely that the price will return to this area before it heads higher, so as long as there is not a strong volume breakout on Monday, wait and enter as near $2.80 as possible, exiting if the price closes lower than $2.70. 

Since the target price range was not hit on Monday, you would have waited.

Tuesday:  The target price was still not hit and the stock was not showing any significant volume rise, so, once again, there was no reason to buy yet.

Wednesday:  When the price dropped down from the $3 area it became apparent that it was in a minor downtrend.  On this day you could have drawn a trendline connecting the two outside extreme points.

Thursday:  The trend was tested, but proved to be in tact and it was still not yet safe to enter.  Besides, the target price was not yet reached.

Friday:  Finally, the downtrend was breached and since the price was now close to the target, you could feel safe in trusting that you were getting a reasonably good entry point.

This breakout entry strategy will not work in every circumstance, but it is one tool that you can use to find a good entry point.  Remember, the goal is to enter as close to major support as you can.  When you can use tools such as this strategy to do so, you are one step ahead of the market.