HWAY, Flags, Breakouts & Volume
Wednesday, January 30, 2008 at 10:57AM On last weeks watchlist, I highlighted HWAY as an emerging flag pattern. Today the stocks gaps down as much as 20% on bad news regarding a competitor. Seeing that a few people were in this trade, it might be fitting to take a closer look at trading breakouts.
A "breakout" trade is one in which you wait for a stock price to trade/close outside a support or resistance area. Breakout trading is a popular strategy, and if you want to learn more, visit my post titled The Anatomy of Trading Breakouts.
With HWAY we were dealing with a price pattern, which happens to be confirmed once you see a breakout. It was a flag pattern to be specific, which is a narrow channel of price action which is preceded by a sharp move in the stock price. The reason it gets its name is because it is supposed to resemble the look of a flag.
HWAY- Look Like a Flag To You?
When trading flag patterns, one is supposed to let the pattern continue to channel until a sharp move in price (and volume) takes the stock price outside of its channel.
Trading the Entry/Exit strategy does not work when trading breakouts. Why? Because you are waiting for a BREAK OUT to signal an entry of the trade, and a break out means that the stock price accompanied by volume should be taken well away from old support/resistance levels. The further away the stock gets from old support/resistance ought to tell you what is at risk by taking the trade. Naturally, you should allow the stock the flexibility to come back to these old levels, as a re-test of these prices is normal and occurs most of the time.
Take a closer look at HWAY, do you see any sharp price movements or surges in volume to determine a breakout?
I tried looking at this as a possible "anticipation" trade...but I can't see a level of support near enough for one to manage their risk. The truth is that this stock was way over extended from it's initial triangle breakout in early Jan. This downward consolidation of prices/flag could have been a great set-up had it confirmed. However, upon review I think many can see that it did not confirm. The gap down was obviously an unforeseen casualty, and there is not much that can be done about it now. Had I been in the trade, I would have closed out and tried to salvage any premium left.
Anyone else have a point of view about this?
Reader Comments (81)
Jeff,
You have said in the past that flags are more like a bounce trade for volume purposes than a breakout trade. This sounds like a departure from that.
I have made the comment in the past that they can be treated that way; but there is a big difference here...no support.
Volume isn't required to take a trade bouncing off support, but is more important when trading a breakout.
Jeff....
I think your analysis of HWAY is spot on..and I LOVE to anticipate pattern breakouts myself..but I like to do so only when a strong trend is in place AND i can get in on a trend line (EE)....otherwise, price and volume as you have taught..
Here's a question...on a pattern breakout, how much "into the move" are you willing to let a breakout go before your chasing the trade due to too large a breakout move?? A particular percentage of the move predicted??
Jeff - I looked at HWAY at one point yesterday and was pi$$ed that i didn't get in...it hadn't broken out, but it looked like it wanted to. Fortunately, I have been waiting in cash for after the FOMC meeting and didn't place an ANTICIPATORY trade at the time...Thanks to reading your "Anatomy of Trading Breakouts" article more than once!
Raimo,
I've never predetermined that, but I would say at the very most, 25% of the expected target price. That would still leave me with a 3:1 R/R.
I was in the trade at my own risk. I felt good about the pattern and decided to go in early, knowing full well the risk risk involved. Before the open today I saw the stock trading around 57 and sold it short. As soon as the stock options opened I closed out my position. Of course I took a loss, but the short made up for some 40% of it.
Would a smaller flag cause you to lessen your need for volume on the move outside of the channel because you are nearer a support level?
Jeff,
On a day when I'm sure you have a full plate, FED Day, but still two great posts! Thanks for the leadership and direction.
Re: HWAY. Trading a flag that is not near support i.e. HWAY, would you wait towards the end of the day to enter as it is more of a breakout then a bounce?
Thanks.
Awesome post Jeff. Awesome questions and comments Raimo. Arty you are just awesome.
CWebb is making the league minimum.
Long - @esh08
Short - @esh08
Cheers,
Arty
Jeff, I was thinking that a strong argument could be made for a diagonal line of support from the bottom of the candle on 12/18 to the bottom of the candle on 1/25 - hitting several places along the way. Do you see what I am referring to?
VABeach,
Regardless of the size, if you are near a level of support, from a risk standpoint, there is no reason not to take the trade in anticipation of a move higher; which at that point would not require volume. However, being nowhere near support, and pinned at resistance, I would have waited for volume and a big move outside of resistance to take that trade.
Where do you OAs get your info about the FED, CNBC, Marketwatch??? Just trying to find the fastest source of what the Fed announces.
I am closing all programs except TOS.
Michelle TOS will send the announce immediately to your trading desktop via an alert!
Cheers,
Arty
.50 cut
50 bp cut on both fed and discount window
.50...I'm so happy I'm buying a new speedo.
Arty,
I like that trade right here, right now...
Hilarious.
ZZZZZZZzzzzzzzzzz.............
Niner...
Who's buying this rally?
I didn't get any popup alert from TOS on the announcement. Aside from watching the 1m tape on $SPX (which was amusing) my first news as to the ratecut decision was from this blog....scary! :) Is there a TOS setting that controls this alert window?
It popped up on ToS for me
Were we supposed to buy Jeff? Everything seems out of whack right now I guess. I'm still new at this though.
Jeff - I'm still in cash, no confidence in my abilities anymore in this market - I've lost too much already.
Matt - Are you using the website or the application? The software app just has it pop up, probably won't get that from the website.
Jim
Jeff,
When does the Bear party start again? Between 1375-1400?
I will not buy the rally with the VIX holding steady... so far...
I might not be doing it right, but the SPY is currently at a 38% retrace and the 20 moving average. Think there is any chance the market will turn here?
I'm at the same stance as Logan. VIX has not budged with the move up and the VIX was already high considering the flat market prior to the announcement.
Jeff don't scold me I took 12 esh08 points and no I am short. Am i a fucking idiot?
Cheers,
Arty
nibbling on some amgn stock for the retirement.
Hmmm. I'm running TOS desktop and no alert popup... strange.
Is anyone else's VIX tracker stuck at +$.83 for the day?
Matt,
It posted at 12:15:12 MST
TOS
I got no pop up alert when bernankapoo spoke
FXE breakout pending.
Maybe it's just me, but it seems that .5% is a non-event. Nothing unusual to trade, just going back to my standard rules.
Given this, we are up at resistance on a lot of plays. I'm hoping the markets push up enough for me to get some great fills on bearish plays and then I think we're headed down, at least to test recent lows.
HANS could confirm but with the IV and spread on the options i guess a short is in order.
Brian k
Jeff:
I am not trading anything yet.
CWebb called time out, so I'm in a holding pattern.
$vix is at around -1.36
I got the pop up on TOS before CNBC announced.
And I am not buying this rally
ART
How do you trade a gap that looks like a flag with out the pole as in ILMN - trading 3 above resistance and retraced ~ 2/3 of the gap. Is this an a reasonable anticipation entry or does it need to drop and bounce off the resistance at 63?
Tom in SC
Jeff,
Got it. Thanks for expounding as I was being too absolute/rigid in my thinking. I had no problem with the risk being less if there was close proximity to support areas and being able to be more anticipatory in your trade. In that instance I'd be trading more the support and a flag breakout would just be gravy.
IMN breaking out of a bull flag. Or is the one time pole not valid?
Cramer just told Erin Burnett to start buying financials; he says he is 100% bullish. I guess it's time to short.
FFS people are buying POT like crazy!
Arty
Hello All and THE OPTION ADDICT,
Does anyone else see a short-term cup & Handle on SHLD.
All thoughts are appreciated.
Thanks,
Steve
Uh oh, people are selling POT like crazy
Cheers,
Art
If someone is selling POT, someone has to be buying POT, which means someone is consuming POT...
At least I still own GLD.
$5?!?!??!?! Does that mean demand is down?