TODAY'S BREAKOUTS & BREAKDOWNS

Another interesting day we had. Not in terms of massive movement, but the anticipation that’s building up. I mentioned that this anticipation will keep us in a consolidation area and the reason is because there’s too much uncertainty to overly take one side. I expect passage in the Senate no problem. After an intraday head-and-shoulders pattern, the announcement that Buffett took a $3 billion stake in GE caused an instantaneous spike upward. Without that news, we would probably have been in trouble today.

WE had 2 solid breakouts today: Commerce Bancshares (CBSH) and Epicor Software (EPIC). I added a third, UCBH Holdings for the future.

CBSH is probably the only highly liquid financial stocks that broke higher than its previous short-term high. That’s quite an accomplishment in this difficult environment. But here’s something better: CBSH not only made a new 52-week high, but it’s the stocks highest ever! This is one of the strongest financials to own with a solid long-term (30-year) chart.

EPIC gapped up and formed a breakaway gap. Looking at April’s gap down, EPIC also formed an island reversal. There’s a high chance that EPIC will continue higher based on the success rate of islands. Prior to the breakout, EPIC formed an ascending triangle, known for upside breakouts. Looks out for these formations in your own stocks. Make note of the 200-day MA which could provide some resistance, but otherwise, EPIC has finally started to fill it’s previous 2-point gap down.

UCBH slightly broke out today out of irregular consolidation. This bank has been strong since July and appears to move higher at this point. A break above 200-day MA is a definite buy.

Like the past 3 days, we’ve had numerous breakdowns. We actually hit 116 new lows today vs. 16 new highs…still an unsightly comparison. These stocks are to be entirely avoided, and with all future breakdowns, they are not something to be buying “cheap”, you might end up trying to catch the knife a few times. Today’s breakdowns: SLM Holding (SLM), Verso Paper (VSR), PHH Corp. (PHH), Foundation Coal (FCL), Actuant (ATU), Crosstex Energy (XTXI), and Finish Line (FINL).

Goodness. SLM broke its 2000 (year) support. There aren’t any remaining major support levels and like the homebuilders, SLM is near the level where they were before the big bull run. Remember, we still have hit bottom before we invest in these types of stocks, and now is not the time.

VRS IPOed in May of this year, a terrible time to IPO in my opinion. Whoever got the stock at $10 has lost 80% of their investment in 5.5 months. The problem with IPOs is that there are no defined support level. These levels are critical to determine where we are and we where we will likely head. Wait this one out until higher lows are made.

PHH has broken its downtrend channel and looks like it will go lower. PHH came out early 2005 at $20, and is sitting pretty close to cutting that in half. A bottom is being hammered out and it will take many months before any long position is considered.

There are still people who are into this ‘coal craze’ and still think we’re going to head back up. Maybe we will, but is it likely anytime soon? No. Those are the people that still have yet to sell and once this flush out occurs, a series of bottoms will form. This is a classic parabolic ‘boom-and-bus’ pattern. FCL sitting at the last major support level before it goes sub-$10. I suspect we will hit it.

If you need a short position for the long-term, and I mean for at least a year, then here it is. I don’t judge that by ATU’s chart below, but by the 10 year chart. ATU is in a mature stage 3. At this point, stocks make erratic and deep corrections and seem to have difficulty making higher highs. You can even consider the $29-$32 consolidation as a possible right should of a head-and-shoulders pattern. There is support at $20, but after that, the stock will freefall.

Want another long-term short? Consider XTXI. The stock IPOed in 2004, jumped to $40 and broke its uptrend earlier this year. There isn’t much credibility in support levels for IPOs that have not been previously tested. XTXI is currently at excessively oversold levels and we should see a small bounce before resuming the downtrend. Take a look at a 4-year chart and tell me if you see what I see.

You have to take a look at a 10-year chart of SPAR. It looks SPAR missed the NASDAQ boom-and-bust in 2000 but they finally got it in 2007!. The pattern is nearly identical. That tells me that SPAR won’t be going anywhere for the next several years.

XIDE was a 2004 IPO which cratered from $25 to sub-$5. The stock crawled its way back up to $20 before getting crushed again. There is major support at $5 but I think we go well below that. We haven’t hit ‘puke out’ on this stock yet. Notice the rounded top which is one of my favorite patterns and not just because of its aesthetic qualities.

A few days ago, I presented FINL as a possible short opportunity. Well, here it is. There is some support at $8.50 but I would set a target at $7. FINL had an amazing run up since the beginning of 2008. The $10 level is key because it marks 2002’s high and 2006’s bottom. We should see a nice sized bounce to the 50-day at which point if it fails, I do recommend taking a short position.

TODAY'S BREAKOUTS & BREAKDOWNS

Today was one of those days were you had to look at a 3-5 day chart to get an idea if today would be a continuation or reversal day. Typically, if the market is unable make a higher low within the first hour and hold, then there’s a good chance of a continuation to the downside. Tomorrow must make higher lows in order for me to put on long positions, otherwise my shorts stay. Make sure you watch a 3-5 day chart for key support and resistance levels.

Here’s one stock you don’t have to worry about. Sequenom Inc. (SQNM) announced additional positive results for its Down syndrome test. Technically, if SQNM broke to the downside, then it would have formed a “bump-and-run” reversal. Today’s move shows how powerful breakouts are after longer periods of consolidation. Think of it as holding your foot down on a running garden hose and lifting your foot all of a sudden after the pressure builds. Note the 5-6x average daily volume which confirms price action.

Focus Media Holdings (FMCN) looks like it will trade in a range between the 200-day and 50-day MA’s. Today is considered a slight breakout, meaning that the break out is not clear. It’s possible that FMCN may reverse tomorrow, but it looks like this stock is going higher in the short-term. FMCN looks to have formed a breakaway gap.

Downey Financial (DSL) broke out from its resistance level at $4. This is an example of when things can go wrong. Normally, I would short on days like yesterday where it formed a doji. DSL also formed two bearish gap ups before that. To avoid take a hit on these patterns, you have to wait for confirmation of an evening star pattern, or the addition of a strong down day. A gap up or gap down will set the tone for that day’s trading.

We have plenty of breakdowns for today. I would like to mention that two of yesterday’s breakdowns appeared again today (not included in this article). They are Dollar Thirty Auto (DTG) and Pilgrim’s Pride (PPC). Here’s my explicit statement on PPC yesterday: “I don’t suggest anyone go long PPC…unless they’re forced”. The stock dropped 38% today. Ouch!

Medicis Pharmaceutical Corp. (MRX) dropped 13% after they announced that they expected to restate their results from 2002-2008. They calculated returns at the product’s cost not the wholesale price. Don’t they have a CFO? Anyway, you didn’t have be a psychic to avoid this sad day. Look at the descending triangle that formed since May and also notice the lower highs being made. You can also observe the numerous failures or “churning” at the 50-day MA and also note how MRX fits nicely within 200-day MA resistance. All of these warnings would have helped non-technical investors to avoid this day. The next support level is at $10…back in 1999.

U.S. Airways (LCC) is not considered a clean breakdown. However, notice the consolidation pattern and its first failure at the 50-day MA. Tomorrow may determine whether or not LCC starts a new downtrend. As the 50-day and 200-day MA range closes in, the stock must go in one direction so keep an eye on LCC and the other major airlines.

Here’s a 10-year chart of Oshkosh Corp. (OSK). I have no idea why anyone would be buying OSK. This is a future $1 stock and looks like it might possibly happen over 1-3 months. Ever hear that phrase “Bulls walk up the stairs but bears jump out the window”? Six years worth of gains gone in within one year. Please, don’t try to find the bottom unless it’s making higher lows.

Here’s a 10-year chart of BGC Partners (BGCP). Just like PPC, there’s no point in going long. This stock looks like its going to hang out in the single-digits for a while, still recovering from the NASDAQ crash.

F5 Networks (FFIV) is in a parabolic state after forming a reverse wedge. You can also call this a funnel pattern. These patterns are only useful for swing trading tactics and short-term holds toward the end of the pattern. The next level of support is at $20 and I do expect a pullback close to around $25 at which it becomes a favorable short trade before FFIV resumes its downtrend.

Finish Line Inc. (FINL) is not really considered a breakdown, but this may possibly be the end of the road for FINL. Notice the churning at the 50-day MA, which it has never done before. Also note the increase of volume on the down days v. the up days. This stock is losing steam and pay present itself as a nice short candidate soon.

HOW TO TRADE BREAKOUTS & BREAKDOWNS

The first area I look at is the general market, and whether it is trending up or down and key factors such as volume and any one-day reversals. Here’s the S&P 500:

Notice the one-day breakdown that occurred on September 4. The employment picture was terrible. That day marked my entry to get into 100% short positions. No questions, no doubts. One-day reversals are one of the most obvious signs that a trend has ended. If you didn’t add positions on that day, you could have added them in the next two days. Here’s a close up:

By the second and final rally day after the breakdown, you would have noticed that the rally was weak. Afterwards, you had another chance to short on the very first breakdown from the 50-day MA. Additional shorting opportunities occurred on the next three rally days, only to result in another breakdown. Throughout this article, I will mention terms such as flags, high-and-tight flags, sloped flags, pennants, symmetrical, ascending/ and descending triangles and other forms of consolidation you should look out for to get positioned before a breakout or breakdown occurs. If you have any questions, feel free to ask!

The next area to look at is the industry or sector of an individual security. I usually skip this step and move straight to the individual stock. Do what you’re comfortable doing.

Breakouts

Finish Line (FINL) is one of my favorite charts. This is the “measured-move” type of breakout. Notice how each consolidation is a ranged flag that acts as a “step” to a move higher? If FINL cannot make a new high and breaks down, don’t hesitate to short it. You can’t fall in love with the long or short side, there’s only the right side, so add this to your watchlist. Notice how FINL nicely bounces off of the 50-day MA several times? The moving averages are your friend…they tell you how to get in within 1-3 days of a breakout (better than waiting for weeks!)

Medivation (MDVN) is a different type of chart. Notice the sharp spikes? Different chart, same patterns. I say the last gap is an exhaustion gap that will most likely lead to an impending reversal since it’s a bearish gap up giving MDVN a very nice 180% run. Range flags such as the ones in FINL are not the only types of flags. As you can see, there are high-and-tight flags (that form after large spikes) and down sloping flags (As long as the flag’s low doesn’t close below the opening price of breakout, you’ll be fine). After you get into a strong flag pattern, the key is patience!

Quiz Time!

1) Sterling financial (STSA):

2) Jos. A. Bank (JOSB):

3) First Community Bancorp (PACW):

Note: Don’t forget to act quickly if there is a sudden breakdown or significant sign of weakness. Remember, the market is always right, and charts never lie. So if the chart tells you to get out then don’t be an idiot and keep on holding.

Breakdowns

Breakdown patterns exhibit the same patterns as they do with breakouts. Usually, the flags spend about the same time consolidating; however, many times they do breakdown quicker since the market falls about 40-70%+ faster than it rises. This is why so many short-sellers make a fortune in a couple of weeks or months.

Take a look at Mcdermott International (MDR). Notice the same flags that form in consolidation? The beauty of these patterns is that once a breakdown occurs, you get a nice 5-10%+ cushion immediately. That means, if a stock breaks down, but for some reason forms an island reversal and gaps up, chances are that you’ll be close to breakeven. No sweat!

Arch Coal (ACI) is one of 10 stocks I shorted in July that netted me a 23% return for that month. First, notice the one-day breakdown before the first flag? That automatically gave me reason to put ACI on my watchlist. Next, notice how weak the rally is? I typically wait 2 days before making a decision, due to short covering. After the first breakout, this stock presented no more concerns for me. Once a big break occurs, very, very, very few stocks make it back up in a short amount of time. Therefore, lookout for the breakdowns (such as the ones I try to post on greenfaucet daily) and watch them closely. ACI is also a special stock because it managed to form an island reversal. An IR is when a stock gaps in one direction, consolidates, and gaps in the opposite direction, forming an “island”. This reversal pattern is one of the most reliable patterns to come across.

But, be careful! After I look at the general market, on the individual stock, I look for the usual consolidation patterns but also support areas (for breakdowns). You don’t want to get caught in the beginning of a possible rally. My policy is to stay away, because there are thousands of stocks for me to choose from.

Allis-Chambers Energy (ALY) formed a double top and broke the 50-day MA (add to watchlist!). Thankfully, you’ll notice that the market gives you plenty of chances to short. Just because a stock broke doesn’t mean “it’s too late”. Check out the long flag on ALY and how it churned at the 200-day MA, totally unable to rally strong off the moving average. Just focus on the long flag…at this point I’m thinking to myself “this chart looks terribly weak”. After the second breakdown, a symmetrical triangle formed. I don’t usually enter a position into a “symmie” because a break can occur in either direction. In this case it proved to be a continuation pattern that preceded the largest breakdown since the double-top! It pays to be patient. By this time, you would have a 20-25% cushion, giving you enough room to absorb any loss that might possibly get in your way. Good stuff? If you play these consolidation patterns correctly (and stick to your strict exit rules), then large losses become very rare occurrences.

This is a chart of LG Display Co. (LPL). Remember the breakout chart of FINL? This is the inverse of it. Remember when I said bear markets fall much faster? This is evident by the lack of range flags. Instead, you see a series of small flags (most are only 2-4 days long). Once the ball rolls downhill, it’s very difficult to stop it. Again, plenty of opportunities to short!

Bucyrus International (BUCY) formed a weird-looking slanted triple top (this is not a head-and-shoulders because the height of the head doesn’t exceed the shoulders). Couple things to observe: 1) the inability for the second top to make a new high, 2) the large one-day breakdown following the top (put on your watchlist!), 3) the weak rally afterwards, and finally, 4) the strong gap down signaling the end for BUCY. BUCY has been churning at the 50-day MA for 2.5 months, and that’s usually a long time. How do I know that the gap down (first circled) was the end of it? It happened on the strongest volume within that 2.5 month pattern. Once it’s over, it’s over, don’t ask questions, just short!

Hercules Offshore (HERO) formed a nice head-and-shoulder pattern over a 2.5 month period. Notice the flags once again. See the red box? Pays to be patient! Another ball that rolled downhill that couldn’t be stopped.

Gran Tierra Energy (GTE) formed a strange pattern, but I made a new name for it. It’s called the double-top-head-and-shoulders. I’m not sure if it exists, but who cares. I would have added GTE on my watchlist on the first break of the 50-day MA and short within 2-days inside the flag. Notice how I don’t say short on the break? This is a dangerous 50/50 proposition. Sure you might do well if it goes down, but what if shorts decide to cover and the stock rallies 10-15%? Good luck! Therefore, my policy is to not chase stock, but short on the flags. A simple, low-risk/high-reward trade.

Breakdown Warning!

Seriously, if I had any nice patterns to show, I would, so no quiz this time. Everything has gotten crushed so badly and a lot of stocks are in free fall, which leads me to point out something very important:

I do not recommend that you short any gap downs in excess of 25%. The reason is because a dead cat bounce may form or a huge short-covering rally may form the next day, gapping the stock up. Spike downs where an appropriate pattern follows, is ok. Theses bounces are known to take out shorts many times over who chased a stock down or followed a gap down. In a case where there is considerable selling (and if its not a failing financial company) – wait – let it bounce up to as close to the bottom of the gap as possible, then it may be a good short.

Strategy

Whenever I post breakouts and/or breakdowns, just keep them on your watchlist. You might also want to know that I don’t use expensive programs or complicated algorithms, etc. I manually find my set ups on free charting websites. The strategy will not only multiply your returns, but will also help you save in unnecessary trading expenses (I do not have a single paid subscription to any type service and everything I do use is free and publicly available). Fat profits and very little overhead – what a great combo! If you keep an eye out for these patterns and execute the trades, then you will outperform this market. Good luck!