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BREAKOUTS


Bunge's 10-Day Moving Average Breakout

11/24/04 03:39:24 PM
by David Penn

From a nearly month-long consolidation, shares of agribusiness concern Bunge International are once again moving higher.

Security:   BG
Position:   N/A

Who doesn't love a breakout? A whole lot of nothing followed by a whole lot of something is one way to think of this most basic and fundamental technical setup. However, as with most technical setups, even gaming breakouts can be made more effective when other technical tools are deployed -- before, during, and after the breakout.

What do these technical tools include? Sometimes they include moving average support along the lows of the prebreakout consolidation range. Other times, a trader or investor can spot a positive divergence as the prebreakout consolidation range dips lower as it extends. Those who have read my Traders.com Advantage articles might suspect that a moving average convergence/divergence histogram (MACDH) that bottoms and rallies, while prices remain above the 50-day exponential moving average (EMA) would be another supportive technical tool for a breakout. Significant volume increases, gaps, long lower shadows on candlesticks during the consolidation period ... all of these can help a trader evaluate a breakout (or even prebreakout) situation that can be exploited.

Figure 1: Bunge Ltd. A breakout in late October on high volume is followed by a consolidation range and breakout in late November.
Graphic provided by: Prophet Financial, Inc.
 
All of these technical tools just mentioned played a part in helping technicians anticipate the developing breakout in Bunge Ltd. (BG), a member of the often-overlooked agribusiness/foods sector.

Let's count the ways:


Moving average support. Here, I'm looking at the way that the 10-day EMA provided crucial technical support, particularly during the later half of the November consolidation. While it is true that prices often move up and down through moving average support, it is also true that the 10-day (or simply 10-bar for intraday purposes) EMA tends to do an excellent job in trailing lows during trends. Even though BG's uptrend appeared to have stalled in November, the fact that the 10-day EMA continued to provide support was noteworthy. If the breakout continues to show follow-through, then the 10-day EMA should serve as a reliable guide as to when profitable traders might need to say "when."

Positive divergence. While not as powerful perhaps as a month-to-month stochastic divergence (see my "Banks Bounce, Then Break Down," Traders.com Advantage, November 23, 2004; or "Divergences Drive OIH Up," Traders.com Advantage, November 24, 2004, for examples of strong, month-to-month stochastic divergences), a divergence is a divergence. Moreoever, when a positive divergence seems to be developing just as prices are sinking to a potential support level, an exceptional risk/reward scenario often emerges.

In the case of BG, the positive divergence developed in mid-November. Specifically, the positive divergence was between the sequentially lower intraday lows on November 15 and November 19 in price, and the sequentially higher stochastic troughs on the same date.

MACDH. I remain high on the MACD histogram. With BG, the fact that the MACDH bottoms and begins to move up just as share prices are testing support on the 10-day EMA (to say nothing of flying high over the 50-day EMA) is the key to the indicator's utility. With the MACDH in negative (green) territory, the first higher low in the histogram comes with the close on November 23, just as prices are rallying above 50. Taking the range of this day, dividing it by two and adding that value to the value at the day's high provides an entry that would have been filled by Wednesday's follow-through to the upside.


Some of the other factors, such as the increase in volume on November 23 and 24 (in a holiday-shortened week, no less), are also very supportive of the BG breakout. The fact that prices gapped into their breakout on November 23 and gapped up again on November 24 suggest a great willingness to bid shares higher on the part of the bulls. It is interesting to note the way BG behaved in its consolidation (much day-to-day price overlap and low volume) to the way it behaved as it broke out (gaps and higher volume). Finally, I mentioned the relatively long lower shadows on the candlesticks during the November consolidation -- especially toward the end of the consolidation. The long lower shadow on the November 22nd candlestick, for example, was a particularly telling development, especially when seen in the context of the plethora of technical factors already mentioned.



David Penn

Technical Writer for Technical Analysis of STOCKS & COMMODITIES magazine, Working-Money.com, and Traders.com Advantage.

Title: Technical Writer
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