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Breakout Model

Stan Weinstein, in Secrets for Profiting in Bull and Bear Markets, provides one of the most complete models for trading long-term trends. The model employs a combination of proven techniques to identify breakouts from a trading range, to follow the progress of a trend and to identify appropriate exit points. It is important to read the book to understand the full model which is briefly summarized below.

Trading Ranges

The long-term cycle has four distinct phases:

The phases are not always as easy to identify as in the above illustration: a trend may last more than a year and a reversal pattern may be over within a week. Up-trends (or down-trends) may also be interrupted by a trading range before continuing the trend.

The model uses trendlines and breakouts above resistance levels to identify the start of a new trend.

Volume Confirmation

The breakout must be confirmed by higher than usual volume activity.

30 Week Moving Average

No trades may be entered if price is below the 30-week weighted moving average or if the moving average slopes downwards.

Trailing Sell-Stops

Stop-losses are moved up to below the Low of each successively higher trough in the up-trend or the 30-week MA, whichever is the lower. See Adjusting Stop Levels for details.

If the 30-week MA starts to level out and it appears that the stock is entering a Phase 3 top, then the stops are moved up to below the bottom of each successive trough and the 30-week MA is ignored.

Exit

Trailing sell-stops account for most of the exits from the trend. Exit immediately, however, if price falls below the 30-week MA and the MA is no longer rising.

Example

Yahoo is shown with 30-week weighted moving average.

Resistance at $3.00Price breaks above the $3.00 resistance level in June 1997. This is followed by a correction before the entry point at a second breakout above the resistance level which is confirmed by large volume. The 30-week MA is rising stronglyStops are adjusted upwards as the trend progresses, but never above the 30-week MA as long as it is rising. Price crosses below the MA at this point but no action is taken as the MA is still rising.The position is stopped out when price falls below the previous stop level just below $60.00.

  1. Price breaks above the $3.00 resistance level [R] in June 1997. This is followed by a correction before a second breakout above the resistance which is confirmed by large volume. The entry point is marked by [E] and the 30-week MA is rising strongly.
  2. Stops (depicted by trendlines below the MA) are adjusted upwards as the trend progresses, but never above the 30-week MA as long as it is rising.
  3. Price crosses below the MA at [?] but the position is not closed as the MA is still rising.
  4. The position is stopped out at [X] when price falls below the previous stop level set just below $60.00.


 
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