In this edition of charting stocks for dummies, we are going to look at simple breakout to the positive side out of a downward trend channel. Note: This pattern involves similar setups for both positive and negative slopes.
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In this particular chart we will be looking at a breakout of Constellation Energy Group (CEG) – see original analysis post here. Within, really, just a couple of days, this stock moved 10% higher.
The following pattern is by far one of the most easiest and reliable technical setups you will come across.
Before
The initial setup was fairly simple. The stock was on a steady downtrend, with a couple of tests on both the support and resistance. We are waiting for the stock to finally make its move outside the current slope of the trend.
Be it higher or lower – we just want to see a deviation from the current trend. Obviously, a break above the resistance is the buy point we are looking for. The stronger the volume the better.
After
You’ll note that the next day the stock confirmed a move higher, with stronger volume on the break of the resistance. A good rule of thumb is that a major shift in price (up or down) moves in groups of three, as did this one (volume significantly higher on each successive day).
Based on the rule, after that third day you should have taken some profit off the table.
The stock has now formed a typical pullback formation, with support found at the original price target of the downward channel break. This would be a good spot for traders, who missed the initial surge, to get in.
Should the stock hold these levels, then the strong buy recommendations continues to stick.
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