Top Advisors Corner

Martha Stokes: How to Determine Breakout Direction

Martha Stokes

Martha Stokes


One of the most challenging price patterns technical traders encounter is sideways action. To be successful at trading breakouts, which can have the most dynamic runs and gaps, you must learn how to determine which direction a stock will move out of the many different sideways patterns. 

Nowadays, there is far more sideways price action than even a decade ago due to the new types of orders and new venues available to the Buy Side Institutions, High Frequency Trading firms, Professional Independent Traders, Smaller Funds Managers, etc.

There are nine distinct market participant groups trading stocks. Each of them has their own unique “footprint” they leave on the stock chart, based on their order types, entry, lot size, accumulation quota goals, hold time, exits, and strategies.


When studying a stock that is moving sideways, recognizing which market participant is dominating and controlling price during that sideways action helps to define the direction the stock is likely to take when it moves out of the sideways pattern.

What is always a constant is that a sideways price action is finite. At some point, price will break either up or down out of the range. How and when this is likely to occur determines when and how a technical trader enters the stock.

Goldman Sachs, the GS chart below, shows an extreme peak on 3/6/14 for  the “Accum/Dist” indicator, signaling that the move up was not going to continue, and that the correction was far from over.

Then, the lows of early April clearly signaled the end of the downtrend as quiet accumulation started and a shift of sentiment from seller dominance to buyer dominance began. The action was sideways and rather volatile; however, the key aspect of the sideways action in April and early May was the extreme low of the volume oscillator and the “Accum/Dist” indicator shown in the chart below. Also, a strong volume bar action within the sideways pattern three days in a row was a significant signal that buyers had taken control of the stock, even while it remained stuck in a range.

The final aspect of this chart that indicated increasing upside energy was the compression pattern. In this instance, a compression of both the highs of the range and the lows of the range occurred. This symmetrical triangle, although not perfect in its formation, signaled that the stock was poised for a sudden, strong breakout to the upside. The volume indicators all confirmed the upside energy as well. As the lows of the range compressed more quickly, the breakout became imminent, and the triangle was far from closed when the stock broke out and ran up with momentum energy. During all of this compression and the breakout run-up, volume remained consistent with Dark Pool activity. HFTs did not substantially participate in the breakout or momentum run.

Therefore, the footprint most evident on the GS chart is from the large-lot to giant-lot investors who prefer to use Dark Pools or Twilight Pools for their order executions.

Learning to use price, volume, and time indicators in your analysis will improve your ability to determine breakout direction, a key element in selecting stocks to trade, and even for options trading.

Martha Stokes CMT
www.TechniTrader.com
info@technitrader.com