Patience Pays Off If You Miss The Breakout

For many traders, there is nothing more frustrating than missing a breakout in a stock. Many breakouts are explosive and catapult the stock up 5-10% above the pivot point or breakout level. Often, the temptation exists to chase the breakout. Patience may pay off if one waits rather than chasing such an explosive move.

William O'Neil recommends not buying more than 5% above the pivot point or breakout level. The rationale behind this strategy is that if a trader buys a stock several percentage points above the breakout level, he or she will often get stopped out or shook out when the stock retraces to revisit the previous pivot point. This often results in the trader missing the big move that results after such a successful test.

Let's first look at a chart of Southwestern Energy. The stock first brokeout in April, but the volume was too low to support the move. SWN then spends the better part of April and May consolidating at the area of the pivot point before it breaks out again in late May. Traders who chased this breakout were either stopped out or had their money tied up while the stock traded beneath their entry level.

The second breakout in late May is accompanied with much greater volume and catapults the stock several points past its pivot. Again, traders who chased the breakout watch as their position goes red as SWN retraces the move. However, the patient trader could find a better entry point on May 24 as the stock again tests its previous breakout level.

The next chart of Gerdau AmeriSteel Corp. shows two breakouts, both which retrace to test the pivot point before the stock explodes to make its big move. Traders who bought too high during the February breakout were resigned to watch their position stagnate for two months. Patience was rewarded for the traders who waited for a test of the breakout level. The late April breakout offers several days where decent entries could be had before GNA goes on to gain 25% over its pivot point.

Full disclosure: long SWN.