Friday, April 5, 2019

How To Trade a BREAKOUT AND RETEST Pattern

Hey folks! 

I wanted to do an educational post today and discuss the actual pattern that we played for that BABA trade we did this week... 

A "Breakout and Retest" pattern.... 

Perhaps some of you might've noticed that recently(this is especially true in CHOPPY markets) that some times stocks that breakout will sometimes "fail"... that happens a lot, even in strong up-trending markets actually! When a stock breaks out on huge volume, often times the stock will keep on running and it would be very hard to catch that stock if you missed the initial entry and really want to get into this trade, you're left with TWO choices: 

2: WAIT FOR A Successful RE-TEST of the breakout 

As you all know by now, I'm not a big fan of chasing a breakout... I'd much rather remain sidelined and wait for a POTENTIAL retest of the breakout... exactly what we saw in BABA earlier this week. 

This BABA setup was emailed to AOT members with a breakout entry was $180.00 

.....and here's how the stock did since that emailed BABA setup broke out .... 

As you can clearly see in the above BABA chart... the stock did indeed breakout that $180.00 trigger price... some of you caught it on the day and that's GREAT since it ran up to as high as $185.50 two days later.... but notice what the stock did after peaking out at $185.50, it started to pullback.... it fell about $5 to $6 from the peak on Monday morning and started to show signs that it was RETESTING the breakout area on Wednesday afternoon after the stock started to revisit that $180 to $179 area... 

For a successful RETEST of the breakout to be valid, the stock doesn't need to be retest the EXACT price of a breakout, since as we all know, there's no room for "perfection" in trading. Stocks can successfully retest a breakout by simply revisiting the breakout price area. We want to see the stock show us that is willing and able to not only retest the breakout area but also HOLD THE BREAKOUT area once it is retesting the breakout... which is exactly what BABA did on Wednesday. 

We went long BABA at $179.20 with a stop loss at $175.00 
If the stock fell below that $175.00 area, i'd consider that Breakout and RETEST pattern to have failed at that point. 

In the below chart is a STEP BY STEP analysis of what i was seeing at the time this was setting up.... 

If you follow my tweets closely, you'll probably recognize this SMH chart... 

Notice how the SMH broke out nicely in mid-March... ran nicely for a few days and pulled back several days later giving the illusion that the "breakout failed"... NOPE! Breakout did NOT fail! .... it merely pulled back to RETEST the breakout area, building on layers and layers of support as the stock/ETF slowly re-attracts more new buyers for ROUND TWO.   

 So if you missed ROUND ONE... RELAX.... calm down, take a deep breath and wait.... 

Here's one more recent example in ACB ... 

Another setup that emailed to AOT members a few weeks back which played nicely at the time... 
Notice how it broke out nicely and ran up from $8.40 to $10.30 in a few days!! 

I want to especially pay attention to the volume patterns in ACB, both on the UP days as well as the DOWN days. 
Notice how on up days, the volume that's been coming into this stock is enormous, very characteristic of institutions piling into the stock. And the volume on the down days is very minimal, very tiny compared to the volume on the up days. 

A low volume pullback to RETEST the breakout is extremely important when looking to play BREAKOUT AND RETEST patterns.

A low volume pullback is indicative of mild profit taking by the first group of buyers on the initial breakout... a low volume retest that holds in and around the breakout area will attract a new set of buyers to lift the stock price higher. The SMH chart above shows a perfect of this phenomena at play! 

These are great setups to look for, especially in a choppy market where we'll often see this setup come in abundance! 

Hope this post was helpful! 

Happy trading! 

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