When buying breakouts of growth stocks, one of the three main techniques of our momentum swing trading system, there are certain technical criteria we look for because all the best stock breakouts share the same traits.
Last week (May 17), we sold a breakout swing trade in Pandora Media ($P) for a net gain of 14% with a holding period of less than three weeks. Prior to buy entry on May 1, the stock possessed the top 5 technical traits for breakout buying, which we have listed below (see the first chart below for a visual reference):
Below is the daily chart of $P, as it looked at the time of our breakout buy entry:
After we determined that a valid base of consolidation had formed, we then focused on determining exactly when to buy. The technical factors that helped us drill down to a precision entry point were:
The technical signals above told us it was the proper time to stalk $P for potential swing trade buy entry. In the May 1 issue of The Wagner Daily, we told subscribing members we would be buying $P if it traded above $14.18 (just above the April 30 high).
As anticipated, the stock triggered our buy entry that day, and we were long at an entry price of $14.20. The chart below shows our entry point, the subsequent price action, and our eventual exit point a few weeks later:
As $P began climbing higher, our plan was to hold the swing trade as long as the price held above the steep uptrend line that formed on the hourly chart (similar to the way we recently trailed a stop to maximize gains on our swing trade of $SMH).
On the close of May 16, we raised the stop to just below that day’s low because we observed “stalling” action over the preceding two days and wanted to protect our profits. An analyst downgrade caused $P to gap down and hit our tightened stop on the open of May 17, but our sale at $16.17 still allowed us to lock in a nice 14% gain on the trade. This was just a bit less than the usual 20 to 25% gains we typically seek to achieve with breakout momentum trades.
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View Comments
I see the breakout of the T/L on 4/24 but how did you then decide on your entry of $14.20? What triggered you believing the 5 days of consolidation after the T/L break would go higher and break the consolidation period? Also Bullet point 2 in the entry section should read March 8 high, not May 8 high as well. Thanks
Hi Patrick,
What we liked was the extreme tightening of the consolidation after the trendline was broken on 4/24. When there is such a tight volatility contraction, it usually precedes a resumption of the preceding and dominant trend (which is up in this case). So, we targeted $P for buy entry above the high of the 2 days prior to our 5/1 entry.
Also, bullet point 2 is indeed correct, as March 8 refers to the consolidation that started with that day's high (multi-month base building), not the micro consolidation of a few days before our 5/1 buy entry.
Hope that answers your questions.
Thanks for dropping us a line.
Deron
Hi .I am a little confused about your system. It seems had no stop loss in your system
Hi, sorry for the late response. We ALWAYS have well defined stops for every position we enter. Most stops are 4-8% away from the entry. I hope this helps. If you need more clarification please let me know. Thanks.