Tuesday, January 11, 2011

Breakout Setup

You may have noticed that the majority of my recent charts have something in common.  Stocks that are near their 52 week highs, if not all time highs, that have had huge runs and are consolidating near their 50 day moving averages make for excellent long candidates.  Specifically they exhibit often offer some really nice risk / reward entries.  Let's take a look at four recent examples.

The most obvious recent example is in the market itself.  The SPY had moved up substantially from its lows in September of 2010, pulling back and bouncing off the 20 day moving average (red line) no less than 5 times between September and November.  Once the 20 day average had broken the 50 became the next natural area of support.  You can see in the circle that the SPY held the 50 day well and the optimal entry was to buy the open of the day that the downtrend broke, 12/1/10.  Since then it's been smooth sailing for the SPY ETF.

The setup on FTNT was gorgeous.  You can see that this recent IPO, which began trading late in 2009, hadn't done much through August 2010.  In late August 2010 the stock began moving.  From then through late December the stock ran from about 18 to just over 36, doubling in a few short months.  You'll note that there are no pullbacks to the 50 day during that period.  At some point even the best stocks need to consolidate their gains.  In November and December FTNT drifted slowly higher, allowing the 50 day moving average to catch up to the stock, all the while forming a symmetrical triangle pattern.  On Dec. 27 the stock tested the 50 day moving average for the first and only time.  It bounced there, consolidated for a few days and then proceeded to break out.  Buying the breakout above 32.65 yielded a 10% move in three days.

The setup in ACOM is somewhat similar to that in FTNT.  The stock breaks higher in September 2010, out of a 4.5 month consolidation.  From there the stock runs up nearly 50% in just over 2 months, without pulling back to the 50 day moving average along the way.  Like FTNT, a buy at the breakout of the declining tops, just a few days after touching that 50 day gave the buyer a fast return on their investment - 10%+ gains in 2 days.

The TZOO setup varies only slightly from ACOM and FTNT.  You can see that TZOO had never come near the 50 day in the three months it took to triple from 15 to 45+.  The consolidation occurring between Dec. 13 and Jan. 4 allowed the stock to get closer to the 50 day than it had been since the beginning of the run.  The stock tightened up above that 50 day and the declining tops, along with the horizontal tops at 42.34 together, offered an attractive entry on the breakout that occurred on Jan. 5.  An entry at 42.45, 11 cents above the prior high, has yielded a 12% return as of the close today - in 5 days.

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