Chart 1: KLCI breaking above the Symmetrical Triangle. Chart from 26/03/09 to 16/07/09.
When price breaks above the Triangle, the best confirmation would be a significant increased of volume. The rally after a breakout would only be sustainable with sufficient volume, study Chart 2.
Successful Bullish Breakout example:
Chart 2: Kinstel 5060 Chart from 10/10/08 to 8/05/09
As shown on chart 2, price of Kinstel was staying in a downtrend from November 2008 to March 2009, and the volume was mostly relatively lower during its downtrend. As indicated by A, price broke above the T1 downtrend line, but volume failed to increased significantly. Therefore, price of Kinstel pulled back after the break out, but supported by the 14, 21, 31 EMA (Exponential Moving Average).
As indicated by B, after being supported by the 14, 21, 31 EMA, volume began to increased, thus suggesting more inflow of fresh buying interests, pushing the price of Kinstel higher, forming an uptrend, and the 14, 21, 31 EMA served as the dynamic support of the uptrend. As well as the Trailing Stop reference. As indicated by C, price of Kinstel was resisted at RM 0.60 and technically corrected. However, after a brief technical correction, volume of Kinstel increased strongly as price resumed its rally, breaking above the RM 0.60 resistance, continued its uptrend.
As shown by Chart 2, volume is the most important element in sustaining a healthy uptrend. If price should break above any consolidation pattern or a downtrend line without sufficient volume, the breakout signal would be weak, and even a risk of a false breakout.
Failed Bullish Breakout Example:
Chart 3: Lionind 4235, Chart from 7/5/2008 to 6/10/2008
As indicated by A, price of Lionind broke above the Descending Triangle T1 resistance line, breaking above its consolidation. However, as indicated by B, volume did not increased significantly as price broke out above the T1 line. This shows that investors confidence about Lionind was still low, thus price only rally for a short term.
As indicated by C, price of Lionind broke below the 14, 21, 31 EMA after a brief rally, and therefore, the 14, 21, 31 EMA has resumed its role as the dynamic resistance for Lionind, the downtrend resumed.
Chart 3 shows that a bullish breakout with low volume, is usually a weak signal; it implies that the confidence level of the breakout is low, thus the lack of fresh buying interests fail to push the price higher. If volume should failed to increase after the breakout, there is a chance of a false breakout, thus price is likely to resume its previous downtrend.
Case Study No 1: Uemland 5148
Chart 4: UEMland , from 29/04/2009 to 16/07/2009
As shown on Chart 4, price of UEMland broke above the T1 line of the Descending Triangle, ended its consolidation which lasted for 1 month. After breaking above the T1 line, price also broke above the 14, 21, 31 EMA, and therefore, the 14, 21, 31 EMA is now serving as the dynamic support for UEMLand, as well as the Trailing Stop reference. In other words, provided that price of UEMLand is still supported by the rising 14, 21, 31 EMA, investors should hold on to their position. If price of UEMLand should break below the 14, 21, 31 EMA, it would be a signal suggesting an end of the currently rally, thus a sell signal. Resistance for UEMLand are seen at RM1.66, followed byRM2.00.
Case Study No 2: KNM 7164
Chart 5: KNM, chart from 10/04/2009 to 16/07/2009.
As shown on chart 5, price of KNM broke above the T1 short term downtrend line on the 14thof July, indicated a buy signal. Later, price of KNM also managed to break above the Bollinger Middle Band, with strong volume, as indicated by B, thus breaking away from the short term downtrend line which lasted for 1 month.
As circled at C, price of KNM opened with a gap up on Thursday, but resisted at the RM 0.85 level, thus giving a short term over-bought signal, suggesting a chance of a technical correction. Generally, the first target of a technical correction is at the Bollinger Middle Band, and therefore, if price of KNM should rebound above the Bollinger Middle Band after its technical correction, price is likely to resume its short term uptrend, provided that the volume could increased significantly when price rebound from the Bollinger Middle Band. However, if price should break below the Bollinger Middle Band, it would be an end to this short term rally, and the next support is seen at RM 0.705 level.
Case Study No.3: Sapcres 8575
Chart 6: Sapcres, chart from 10/04/09 to 16/07/09.
As shown on Chart 6, price of Sapcres broke above the L2 resistance of the Symmetric Triangle which lasted for 2 months on the 10th of July (indicated by A) with strong volume (as indicated by B), and started its short term rally. The 14, 21, 31 EMA is now serving as the dynamic support of the rally as well as the Trailing Stop reference.
After rallying for 4 days, price if Sapcres hit its resistance at RM 1.66, and retreated slightly, therefore, the current resistance for Sapcres is at RM 1.66. If price should continue to retreat, there is a risk of forming a Double Top, and if price should break below the 14, 21 ,31 EMA, it would end the short term rally, thus a sell signal. In other words, price must break above RM 1.66 with strong volume in order to sustain the short term rallly.
Conclusion:
Whenever price break above a consolidation pattern or a downtrend line, it is usually a buy signal, provided that volume is significantly higher at the break out day, which suggests a strong buying interests. With proper trailing stop reference as a trading plan, investors can reduce their trading risk by spotting the right time to buy and the right time to sell.
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