Identifying A Breakout

08/14/00 05:38:44 PM

by Jason K. Hutson

Drawing key resistance and support levels on charts gives you entry and exit levels when trading.

Security: GE
Position: Buy

There are four simple steps to confirm a possible breakout of a price range. They are:

1. Draw support and resistance levels
2. Confirm penetration
3. Check volume levels
4. Confirmation on re-test of previous resistance level

I will use the chart of GE, shown below, as an example of how to implement these steps. First, insert your support and resistance lines. Make sure that there are at least two minor points of resistance (isolated highs) in your specified time frame. In the example below, I count more than five isolated highs since the end of March 2000. The line drawn across the top of the graph is called a resistance line and indicates an area where supply of the security is abundant.

Second, that resistance level must be penetrated by price action. On August 9, 2000 GE surged ahead a couple of points to over $56 a share and on August 10 there was some follow through price movement up to $57.

Graphic provided by: eSignal.

Third, check the volume on the days before, during, and after the price move. If it is higher than the average daily volume by a factor of 2, there is a good chance all of the remaining supply at those price levels will be scooped up.

Fourth, watch the resistance level carefully. After prices penetrate above that resistance level, it acts as a weak support level. If prices re-test that support/resistance level and bounce upwards you have just confirmed the breakout. This new support level can be a good area to think about placing a stop-loss order to minimize your losses.

Jason K. Hutson

Traders.com Staff Writer. Enjoys trendlines, support and resistance, moving averages, RSI, MACD, ADX, Bollinger bands, parabolic SAR, chart formations, and volume analysis.

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Identifying A Breakout

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