This week we were asked why we tend to look for breakouts versus buying dips or “weakness?"
First let us say flat out that we are not against buying dips at all. It's just that every trader tends to find a niche that he fits in better. We have found over the years that we're better at judging when a stock might make it through a resistance level, than we are figuring out what technical level might hold for support and a bounce.
But we do want to make a point about the term “breakouts" that might be misleading to you. We are rarely if ever looking for breakouts to all new highs on stocks. Sure they occur, but that's almost never our focus. In today's market, some stocks would have to gain 100 points to be near a true “breakout!".
What we have found to be the most accurate gauge for us is a 6 month chart. We look at the stock's trading activity over that time period and base our “breakout" buys on what we see. For instance lets say XYZ was moving up and ran out of gas at $50 in February. It slipped a few notches, bounced, slid, popped and now after all that wiggling around, it's back to $49.50. Do we think it's important for XYZ to clear that $50 level?" You bet. Despite the fact that maybe in October of last year it was 80 bucks, that 50 level it hovered around in February is now a line in the short term sand that's been drawn, and getting over it will probably invite a flurry of new buying for a bit.
So, when we say we look mainly at breakouts and busting overhead resistance, don't presume we mean “blue sky, all time breakouts". That's a true rarity for us, we don't even hunt for them much. We are looking to bust resistance lines formed in the past four to six months as short term buy signals for us.
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