• Trading 101: When Breakouts Fail

    by  • April 5, 2013 7:17 am • Trading 101 with Peter Bryans • 0 Comments

    The market has surely been making some wild swings leading up to today’s jobs report. Last week, I touched on some setups in a few names, and mentioned how I believed that careful stock selection is critical at this juncture in the market. Sure, we made new all-time closing highs after surpassing the 1565 mark on the S&P 500, but we still have not touched the intraday highs of 1576—who knows how soon that is going to occur (it could be today—I have no idea). What I do know is that I have continually observed stocks that had a very strong start to the year show some weakness lately. This has further solidified my opinion that not every long play is going to work right now.

    One of the things you can always count on is the fact that the market will almost never give you anything easy, and that what worked before won’t always work again. I’d like to point out some charts that illustrate what I am talking about. LinkedIn (LNKD), Navistar (NAV), and Netflix (NFLX) all had a very positive earnings reaction. They gapped up higher, and had a strong continuation move that followed over the next several weeks. Recently, all three of these names have broken down after showing a basing pattern—i.e. they moved sideways after “digesting” these big gains. Take a look at the charts, and note the lines drawn to illustrate the sideways movement that eventually lead to a sharp sell-off.

     

    LinkedIn (LNKD)

    (courtesy of eSignal–click to enlarge)

     

    Navistar International (NAV)

    (courtesy of eSignal–click to enlarge)

    Netflix (NFLX)

    (courtesy of eSignal–click to enlarge)

    So what can we learn from these charts? Well, when a stock that has recently shown some serious strength grinds sideways for a few days, it could definitely lead you to expect another breakout. In many traders minds (mine included) the risk/reward could look very favorable in such a situation. No doubt, there is an obvious bullish bias with these types of charts, especially considering that we are most definitely in a bull market. However, (and I realize I am repeating myself) what worked before won’t always work again. Don’t expect anything to come easy, and always adhere to your stop-loss levels.

    Trading is a tricky game. Just so long as you never expect the market to give you anything, and that you cut your losses (arguably the most important aspect of trading) it can be a rewarding endeavor.I am still learning a great deal about trading (and setups with stocks such as the aforementioned examples), and how frustrating it can be when there is a “failed breakout” and a sharp move lower. It is at times like this where careful stock selection is all-important, and trading with a plan is a must.

    About

    Peter Bryans joined the Schaeffer's Investment Research trading team as a Trader in April, 2012. A graduate of the Fisher College of Business at The Ohio State University -- where he concentrated in Finance -- Peter previously held internships with an insurance broker and a wealth-management firm. In his current role, Peter trades a variety of our real-time option services and also hosts our "Options Apprentice" weekly webinar presentations.

    http://www.schaeffersresearch.com

    Leave a Reply