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Breakout Day Volume
Breakout day volume is a comparison of volume on the day price breaks out of the chart
pattern with the 3 month average volume level. Chart patterns with high breakout day volume tend to perform better than
do those with low breakout volume.
If you know what a rectangle chart pattern looks like, then you know what a flat base is.
Look for a price area in which the stock touches the same value multiple times over several weeks or months, often
moving within a trading range. Price bounces between the upper and lower boundaries. Flat bases are rare but when they do occur, they can lead to powerful rallies.
Many chart patterns appear at a price just below the base, like a pothole in a road. The figure shows an example of
this pothole pattern holding a diamond bottom after a flat base.
A gap occurs when yesterday's high is below today's low (bull gap) or yesterday's low is above today's high. Use the breakout day to see if price gapped from the prior day. If price has not broken out yet, then assume a gap will not occur. The figure shows an example of a breakout day gap from a diamond chart pattern.
Higher Right Bottom
Look at your triple bottom and determine whether bottom 3 is above, equal to, or below bottom 2. Research shows that in
a triple bottom, price rises higher when the low price at bottom 3 is above the low price at bottom 2.
Horizontal Consolidation Region (HCR)
A horizontal consolidation region is a congestion area marked by a flat top, flat bottom, or both, or prices that
share a common value. It is a support or resistance area, any area in which price moves horizontally. A HCR only occurs from the trend start to the start of the chart pattern. Thus, if a symmetrical triangle has price trending up to the triangle and the breakout is up, a HCR will not matter. For a downward breakout, you would score an HCR if one exists. I usually assume that a HCR will be in the way of the stock unless the breakout is at a new high.
The figure shows an example of overhead resistance. If the breakout were downward, then you would look for
underlying support -- anything that might cause price to stop or reverse.
Market capitalization is the number of shares outstanding for a stock multiplied by the breakout price. Many websites list market cap.
(finance.yahoo.com) lists market cap on the Key Statistics page (from their home page, enter a stock symbol, click Go, and Key Statistics will be listed on the far left column under Company).
The market trend is the difference in the S&P 500 index (or other major index that represents your market) from the day the chart pattern started to the day it ended. Often you can tell the trend just by looking at the index between those two dates.
A neckline joins the armpits of a head-and-shoulders chart pattern. Figure 1 shows a neckline
sloping up (in red) and Figure 2 shows the
red neckline sloping down.
Is the left shoulder low above the right shoulder low? Patterns with even shoulder lows perform best but
they are rare. The figure to the left shows the left shoulder low is above the right one.
Which shoulder is higher? A higher left shoulder suggests better performance. The figure shows a lower left shoulder.
Throwback and Pullbacks
A throwback occurs when price breaks out upward and returns to or comes close to the
breakout price within a month. A pullback is the same, but the breakout is downward. I
always assume a throwback or pullback will occur.
The figure shows an example of a throwback. When a throwback or pullback occurs, performance suffers. Thus, look for
overhead resistance or underlying support that might cause price to reverse direction. When scoring a chart pattern,
assume a throwback or pullback will occur unless price is making a new high.
Look back from the start of the chart pattern and determine where the trend starts, then measure the length of time
from the beginning of the trend to the beginning of the chart pattern. To determine the trend start, the rule I use is
this: look backward in time for the lowest low followed by a rise of at least 20%, or the highest high followed by a
decline of at least 20%. Those turning points, the lowest low or highest high, represent where the trend starts. Most
times, you can spot where the trend starts visually. Whether to search for the lowest low or highest high, I use
whichever drops below or rises above the bottom/top of the chart pattern first. The above figures show examples of this method.
Many chart patterns will do well, post breakout, if volume trends
downward over the life of the chart pattern, but this varies from chart pattern to chart pattern.
Measure the volume trend from start to end of the chart pattern. I use linear regression to determine
the slope of the volume trend, but often you can tell the volume trend by looking. Use the above figures
as examples. Figure 3 shows a rising volume trend, and Figure 4 shows a falling trend.
Yearly Price Range
Look at a chart for the stock over the last 12 months and find the highest high and lowest low during that time (up to but not including the breakout day), then enter the prices in the space provided on the scoring form.