T2W Trading Community

Wait to add to the position until the stock takes out the top of the flagpole, which is key short-term resistance. This will protect against a head fake, which is a move that starts out dramatically but quickly fizzles price- and volume-wise after just a bar or two and has no follow-through and in particular does not make it through the top of the flag pole.

Set a stop below the bottom of the lowest level reached during formation of the consolidation or flag pattern out of which it has broken.

Kendle, after pulling back on low volume in late-March and April, flattened for a month at its moving averages just under 12. In early June it broke out through 12 towards its previous rally high near 13 and was contained there for a few days before breaking through that key resistance zone and never looking back.

We got into Kendle at that 13 level, the top of the flag pole, on June 5 and rode it up until the pullback in August at around 19. We had a set a price target near prior overhead resistance at around 20 going back to the start of 2002, and when that level contained the stock we exited, happy to take a 50% trade. We are also short-term traders, looking for quick (1-week to 1-month) round trips out of the ebbs and flows of breakouts and consolidations. Kendle went on to hold its 21-day moving average at around 18, and rally from there to nearly 29 by the end of September.

The Kendle example illustrates the potential that chart patterns such as high-volume breakouts from long bases and low-volume flags can have in predicting price appreciation.

Energy Conversion Devices (ENER)

Another strong illustration is Energy Conversion Devices. After a surge out of a nearly two-year base pattern in the fall of 2004 that doubled the share price to over 20, ENER then hit a plateau for six months before breaking out again in June of this year.

We got into the stock on June 14 at 18.28, just as it was crossing back over its 21-day moving average and its late-May rally high. Such a crossover is a bullish sign, and as mentioned takeouts of prior rally highs are good points to enter. Like with Kendle, we exited after a 50% gain, at 27.50 on August 9. The stock had only slightly broken its long-term resistance level at 27 going back to 2002, but wasn't thrusting on heavy volume and seemed due for a retracement. In fact, this was about the high for the rally, and the stock did consolidate somewhat. Our mistake was not to re-enter when it broke out above that level a couple weeks later on its way to close September at 44.46 -- and doing so while never once breaking even its 21-day moving average!

(click to enlarge)