Breakouts and Channel Breakouts to New Highs despite market direction.
Channel Breakouts are a popular method of trading stocks. The principal
behind a Channel Breakout is that when a stock trades above the highest
price or below the lowest price in the last N (number of periods) number of
periods, a new trend may be starting to take place.
This channel trading method can be used in any number of periods from
minute bars to weekly time frames.
The results of using such a method will often result in a stock moving
above a defined resistance or below a defined support area.
I feel that with any pattern, indicator, or strategy, the key is to
recognize when it works and when it doesn’t. A pattern or indicator
tested over a long period of time may only have a 50-50 chance of working
out in a trader’s favor. A key to successful trading is to limit
losses with stops and recognize when the pattern or indicator did not
perform as expected.
I like using a 20 period breakout.
When the breakout also takes a stock to new 52 week highs, that is
significant.
Despite a major market correction over the past couple of months, VSTR has
been breaking to new highs for months. This is a picture of strong stocks
getting stronger regardless of the overall market.
Let's look at Voicestream Wireless (NASDAQ: VSTR).
This is a good example of a stock that has been breaking out of 20 period
channel highs and continues to break these as the stock moves higher and
higher.
Remember that we are using 60-minute bar charts here, but this can work in
almost any time frame. In fact, if you look at VSTR on a daily chart, you
will see similar pattern on the dailies going back months.
October 12, 1999 was a 52-week high in the stock.
After a few days of retracement and consolidation, on October 19, VSTR
broke to new 52-week highs again.
VSTR ran higher for a few days. On October 25, VSTR stopped moving up and
traded lower over the next few days, retracing a small portion of the last
breakout.
On Friday, October 29, VSTR once again broke to new highs.
This pattern of new highs, consolidation and new highs again shows major
strength in a stock
I would Buy VSTR here.
I would place a stop at 93.
