Here's a great example of a downtrend channel breakout, with write up for another site I recently posted to, showing both bullish and bearish cases (wow, balance on HC, who knew that was possible?!)
Hope you all had a Merry Xmas - 2018 sure is lining up to be a doozy for TBH!
Current example of a Channel Breakout - TBH
Channel breakout trading is used by momentum investors to take a position in a stocks early change in direction. This strategy can be the starting point for a major price move and result in significant profits if managed properly.
A channel breakout is a price movement that moves outside a defined support or resistance level with increased volume. Once a stock trades beyond a price barrier, volatility tends to increase and prices usually trend in the breakout's direction. The reason why channel breakouts are so widely utilised is that they show a significant swing in market sentiment, may be the starting point for major price trends, and may lead to large price swings.
Using TBH as an example, we can see that the stock was in a downtrend channel with low volume consolidation ongoing for quite some time after the 50 cent high. Going either long or short, we could see the upper/lower channel lines moving lower as time went on - where we would place our trades on a breakout either side. As it happens, TBH made a major announcement (catalyst) on 22nd December regarding onboarding a major UK betting agency, resulting in the share price leaping above the upper trend channel line. This movement was confirmed by both high volume, a sharp bullish DMI cross and MACD gaining further momentum into positive territory.
Where to from here?
In a bullish case, the high volume breakout will continue to "gap away" and retest the horizontal resistance from 40-42 cents as the share price runs up the bollinger band (not shown). If a break of that resistance occurs, the all-time high of 50 cents will then be seen soon as little volume trading has been conducted as the levels between 42-50. After 50 cents, you have a "blue-sky" scenario.
In a bearish case, it is not uncommon for breakouts to have retests of a trend line, so a pullback to the resistance-turned support line may be on the cards (currently sitting at 35 cents). In addition, a "gap fill" may occur back to 31.5 cents. If this happens, a "bull trap" will have occurred and the downtrend channel will be back in effect, probably leading to lower prices.
(NB - a common myth among traders is that gaps need to be filled all the time - a breakaway and unfilled gap is very bullish and shows strong market sentiment!)
Finally, always remember to set your stop-loss or take-profit lines according to your trading strategy and abide by them!
Merry Christmas, Happy New Year, and happy hunting out there!
TBH Price at posting:
37.0¢ Sentiment: Buy Disclosure: Held
