Identifying Breakout Patterns Prior to Momentum Runs
The Importance of a Volume Oscillator in the Market Today
The most difficult aspect of reading stock charts for most Technical and Retail Traders are the sideways patterns. Many traders simply do not know how to interpret sideways patterns, to determine in advance whether the stock will move up or down out of the sideways pattern. This is often why Options Traders use spreads and lower their profit potential, or end up with a break even options premium trade. Neutral Option strategies restrict profitability and can cause a loss or no gain option trade.
Learning to read sideways patterns requires not only candlestick analysis, but also the proper indicators that help. One extremely useful indicator is the ChiOsc, which is a volume oscillator. Most Retail Traders are not familiar with volume oscillators. In our modern automated, multi-venue Stock Market they have become essential indicators for those who want to make a living trading stocks, or those who wish to augment their income from trading stocks or options.
The chart example below is a fine example of the importance of a volume oscillator for identifying breakout patterns prior to Momentum Runs. I have drawn red lines to indicate Resistance, and a green line to indicate Support.
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Unlike price oscillators the analysis is not overbought or oversold, but rather overextended patterns either at the high or low of a run. This provides invaluable analysis for Day, Swing, Momentum, and Position Trading which is not to be confused with Positional Trading.
The sideways pattern in this chart example has many important factors to study in the candlesticks, but without a volume oscillator for Relational Analysis™ they are lost.
The stock moved above a moderate resistance level but then retraced. Why? Price alone does not explain why nor does it warn that the support would not hold, which is a problem for Short-term Traders, who might assume that moderate support should hold. Support does not halt the run down until well beyond the prior moderate support lows. Why? The candlesticks by alone do not explain this price action.
More importantly will the current price action be able to break to the upside, or go back down and run down again? Price alone does not indicate what will happen next. Will the stock move up or will it move down. If you want to be a highly successful and profitable trader, this is a BASIC question that you must be able to answer.
Now let’s look at the same chart with the ChiOsc volume oscillator window added. See the chart example below.
Volume oscillators have far more signals, patterns, and analysis than overbought/oversold price indicators. It does take more time to learn how to interpret them properly, but it is time well spent. The Why of price action is in VOLUME for identifying breakout patterns prior to Momentum Runs.
For the failed attempt to break to the upside and sustain the price above the highs of the prior resistance, volume shows clearly an overextended pattern that quickly declines even BEFORE price drops down after the consolidation. Leading price, the ChiOsc Indicator tells you the volume is insufficient for the stock to hold this price. The indicator also shows during the run down that it will go beyond the lows of that consolidation.
Then the ChiOsc troughs above the low of the chart, angling upward even while price once again consolidates below the moderate resistance level. The crossover is a signal that confirms the candlestick buy entry signal. This provides a low risk entry before the stock moves with momentum.
The final extreme overextended ChiOsc Indicator pattern indicates High Frequency Traders HFTs have taken control of price, and the stock will stall in its run up or encounter profit taking.
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Volume oscillators are one of the most important indicators for trading the automated market where more and more professionals are using alternative trading venues which leave the Retail Trader in the dark. Price oscillators offer minimal help. Volume oscillators show why price is behaving as it is, and indicate how price will move in the near term.
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Martha Stokes CMT
TechniTrader technical analysis using a StockCharts chart, courtesy of StockCharts.com
Chartered Market Technician
Instructor & Developer of TechniTrader Stock and Option Courses
TechniTrader DVDS with every course.
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