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Ask The Trader
Wednesday, January 17, 2001

Why Wait for Breakouts

It seems like you are leaving a lot on the table by waiting for a stock to break out of a range.

By waiting for a stock to break a level of previous resistance you are, in essence, lowering your risk that the stock will reverse course as soon as you enter the trade. When you wait for a stock to prove its vitality by breaking through an obvious resistance level on above average volume, you are placing a bet on a stock in which buyers have supplanted sellers. For the uninitiated, a resistance level is simply a price range where sellers have provided too much overhead supply of stock for the existing buying demand, therefore turning the stock lower. Another advantage of waiting for a stock to breakout is that the resistance level that the stock rises through then becomes a natural support level under which to place your protective stop.

A great example of why we wait for breakouts could be seen in Invitrogen (IVGN), a recent stock on our Watch List. We were waiting for the stock to break through an ascending triangle on above average volume before we added the stock to our Current Play list. The stock traded right up to the breakout point of $87 on weak volume and was turned back for a scary $30 ride lower. Needless to say, we avoided the free fall because we remained disciplined to our trading strategy and didn't jump the gun just because it looked like IVGN might break through resistance at $87.

A successful breakout trade came recently for Splittrader in Ryland Homes (RYL). We were watching for the stock to breach $41.75 on good volume. RYL achieved a breakthrough of this level on 01/04/01. Ryland then came back to test the pivot point of $41.75 (most stocks will do this) and as it turned out, it successfully held. The stock has since gone on to show good relative strength and excellent buying support.

Good Luck and Have a Profitable Trading Day

Craig Seidler
Assistant Editor


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