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Consolidation Breakouts Defined |
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A Consolidation Breakout is a technical
formation that indicates bullish or bearish price action. There are a
few things you must look for when establishing whether or not you can
place a trade based on a consolidation breakout...
The stock must be trending sideways (consolidating)
The stock must break out of the consolidation pattern with higher than
average volume confirming the breakout move. A break above
consolidation resistance on higher than average volume is a "bullish
breakout." A break below consolidation support on higher than average
volume is a "bearish breakout."
You may enter your position after the breakout move. In some cases
you will see the stock retrace to the previous resistance/support
level, which provides an optimal entry.
To measure the "post breakout" move, simply follow these steps
Subtract consolidation resistance from consolidation support to
establish consolidation height (consolidation resistance -
consolidation support = consolidation height).
Add/Subtract the consolidation height to/from the consolidation
breakout point depending on whether it's a bullish or bearish
breakout.
Place your target accordingly.
Ex: The chart below displays MSFT's 3 month daily bars chart. Note the
consolidation patter with resistance at 30.25 and support at 29.50.
This results in a consolidation height of 0.75. Since this was a
bullish consolidation breakout, add the consolidation height, 0.75, to
consolidation resistance, 30.25. This equates to a measured move of
31.00 (30.25 + 0.75 = 31.00). Place your target on the trade at 31.00.
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Histogram lines measure the
difference between two moving averages. Crossing above and below the zero line
give buy and sell signals. The same technique can be used to turn two MACD lines
into a histogram. The vertical bars show the difference between two MACD lines.
When looking at the MACD histogram, the bars will be above the zero line when
the MACD lines are in positive alignment, which is when the faster line is over
the slower line. Crossing above and below the zero line will coincide with
actual MACD crossover buy and sell signals.
The real value of the histogram lies in spotting when the spread between the two
lines is widening or narrowing. If the histogram is above the zero line (in the
positive) but starts falling toward the zero line, it means the trend is
weakening. On the other hand, when the histogram is below the zero line (in a
negative) and begins to move upward toward the zero line, it means the downtrend
is losing momentum. The histogram provides early warning signs that the trend is
losing momentum before the actual buy and sell signals are generated by the
crossing the line. Also, turns in the histogram back toward zero always precede
the actual crossover signals. A histogram is best used for spotting early exit
signals for existing positions. However, it’s proves very dangerous to use
histogram turns as a marker to initiate new positions against the prevailing
trend.
A gap occurs when an index or a stock opens at a price significantly
higher or lower than the previous trading day`s closing price. For example, if
MSFT opens at 27.80 after closing the previous day at 27.50, that is considered
a "gap up". If the Nasdaq opens at 2000 after closing at 2016, that is
considered a "gap down". The term gap is used to describe the look of the chart
when the two days are connected -- there is a "gap" that the stock skipped over.
When someone says "fade" the gap, they mean play the index or stock in the
opposite direction. If the stock gaps up, it will very often "fade" back down
toward the previous day`s closing price. The opposite is true for a stock that
gaps down.
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