How To Use Volume And Technicals To Improve Reliability
And Profitability Of Breakouts
By Mark Boucher

Investors following a strategy similar to the one I teach
here

at
TradingMarkets.com, as well as those who follow an O'Neil type strategy, are apt
to be buying breakouts to new highs frequently. If you're going to be buying
breakouts of four-week-plus flags or five-week-plus cup-and-handles, you need
to know all the variables that can help you improve the percentage of these
trades that are profitable and/or can help you highlight stocks that have a higher
likelihood of moving substantially higher following a breakout. Fortunately, there
are a number of technicals that can help a trader in this regard.

This month, we'll cover five technical tools that our research shows help increase
the reliability of a breakout moving in the intended direction. By putting as many
of these as possible together, traders can substantially improve their odds of
success in trading breakouts of any kind. Here are the top five things we look for
on a breakout to help confirm that a substantial move is in the making (in order of
importance):
1.
Breakout day closes over pivot resistance and occurs on a
TBBLBG.
The most important variable is the price action made on the
day of a breakout. TBBLBG stands for T
hrust Breakout, Breakaway Lap,
or B

likely to be a true market leader and is more likely to follow through. (See
Figure 3.)

Figure 3.

4.
Prior to the breakout day, the trading range showed more
accumulation days than distribution days.
An accumulation day is a
day where prices rise on volume higher than the previous day. A
distribution day is a day where prices fall on volume higher than the
previous day. A strong stock will show more accumulation days than
distribution days during its trading-range consolidation prior to breakout.
The second chart of ACRT is an example. If you count up-volume days
that are more up vs. up-volume days that are down, there are three more
up-volume days that are up than down prior to the breakout day. (See
Figure 4.)

Figure 4.

5.
One or more of four volume accumulation indexes breaks out to a
new high (new high prior to trading range) before the breakout day
in price.
We use Money-Flow, OBV, William's Accumulation, and Volacc
as volume accumulation indexes (see Science of Trading Course). If you
have access to any of these, check to see that your stock has at least
one of these volume accumulation indicators breaking out to new highs
ahead of price. (See Figure 5.)