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Upside Breakout Rectangle Patience
Monday, January 9, 2006


Morning Update - Rectangles and GPRO

I want to go over what type of patterns rectangles or slim jims are. They are also known as upside breakouts. Please read the description. Rectangles are some of my favorite patterns to play. GPRO is in a rectangle pattern.

Gen-Probe Inc. (GPRO)- Weekly Chart

On the weekly chart, GPRO is in a long rectangle / slim jim. In addition, it held the uptrend line on the weekly at $38.36. GPRO is bullish on all time frames. It is one of my favorite stocks. In addition, the Stock scan has picked up GPRO as a bullish play. Indicators and oscillators are bullish. GPRO is overbought in terms of stochastics, which is good, because this is when stocks make their best gains. However, since it is in a rectangle pattern it could also reverse and go down to the $30.00 area and still hold the pattern. There is also huge short interest in this stock which should propel it higher. My target is in the $70.00 - $80.00 range once it breaks out above $53.00.

Upside Breakout Classic Pattern--There is only one thing this pattern requires "patience"!!

Implication

An Upside Breakout is considered a bullish signal, marking a breakout from a trading range to start a new uptrend.

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Description

An Upside Breakout occurs when the price of a financial instrument breaks out through the top of a trading range. This technical event indicates that prices will rise explosively over a period of days or weeks as an almost vertical uptrend appears.

chart patterns

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Trading Considerations

Inbound Trend

The inbound trend is an important characteristic of the pattern. A shallow inbound trend may indicate a period of consolidation before the price move indicated by the pattern begins. Look for an inbound trend that is longer than the duration of the pattern. A good rule of thumb is that the inbound trend should be at least two times the duration of the pattern.

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Criteria that Supports

Duration of Trading Range

The duration of the trading range for which the breakout occurred can provide an indication of the strength of the breakout. The longer the duration of the trading range the more significant the breakout.

Narrowness of Trading Range

The "narrowness" of the trading range can also be used to gauge the breakout. To determine the narrowness of the trading range compare the upper boundary with the lower boundary of the trading range. If the trading range has a small difference between the upper and lower boundary (making it narrow) then the breakout is considered stronger and more reliable.

Support or Resistance

Look for a region of support or resistance around the target price. A region of price consolidation or a strong Support and Resistance Line at or around the target price is a strong indicator that the price will move to that point.

Moving Average

Prices which quickly move 50% above the 200-day Moving Average strongly support this pattern.

Moving Average Trend

Look at the direction of the Moving Average Trend. For short duration patterns use a 50 day Moving Average, for longer patterns use a 200 day Moving Average. The Moving Average should change direction within the duration of the pattern and should now be heading in the direction indicated by the pattern.

Volume

A strong volume spike on the day of the pattern confirmation is a strong indicator in support of the potential for this pattern. The volume spike should be significantly above the average of the volume for the duration of the pattern. In addition, the volume during the duration of the pattern should be declining on average.

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Criteria that Refutes

Duration of the Trading Range

The duration of the trading range for which the breakout occurred can provide an indication of the strength of the breakout. The shorter the duration of the trading range the less significant the breakout.

Narrowness of the Trading Range

The "narrowness" of the trading range can also be used to gauge the breakout. To determine the narrowness of the trading range compare the upper boundary with the lower boundary of the trading range. If the trading range has a large difference between the upper and lower boundary (making it wide) then the breakout is considered weaker and less reliable.

No Volume Spike on Confirmation

The lack of a volume spike on the day of the pattern confirmation is an indication that this pattern may not be reliable. In addition, if the volume has remained constant, or was increasing, over the duration of the pattern, then this pattern should be considered less reliable.

Moving Average Trend

Look at the direction of the Moving Average Trend. For short duration patterns use a 50 day Moving Average, for longer patterns use a 200 day Moving Average. A Moving Average that is trending in the opposite direction to that indicated by the pattern is an indication that this pattern is less reliable.

Short Inbound Trend

An inbound trend that is significantly shorter than the pattern duration is an indication that this pattern should be considered less reliable.



GPRO
chart patterns