How to identify Breakout - Price Action
For the purpose of demonstrating how one can identify a trend change using Support - Resistance and Price Action, I have taken the daily chart of IEX. I had also identified and posted about it before the recent rally.
The first step is to establish a clear support and resistance line. In case of a breakout, I like to keep my target at around the same price difference range between old support and old resistance after it bounces from the resistance.
The crucial thing lies in identifying the candlestick pattern around the support - resistance. In our case, when the price first hit the resistance, it formed a clear Bearish Engulfing and the next time, it formed a healthy dark cloud cover followed by an engulfing. These are clear red flags when a trader should start booking profits.
Similair bullish patterns can be identified at support region like the Morning Star pattern as in the above chart.
In order for the price to give a breakout, Volume & Momentum play a very crucial role. A rising volume with price rise builds momentum, and increases the chances of a breakout. Another important observation is to see HOW STRONG did the PRICE BOUNCE from the support. Long wicks, very less or almost no consolidation around the support and a bounce back from an area above the support instead of retracing all the way back to the support are clear indications of trend reversal from Bearish to Bullish.
Also notice how the candle formed a Morning Star during the bounce, this further strengthens our conviction that the trend is changing.
Observe how the red candles grow smaller and smaller as they approach support, this indicates weakening of the bearish momentum.
Also the Resistance was approached in a very aggressive foray this time with clear long green candles indicating a very strong pent up demand.
I hope this analysis provides some insight into how the Price action gives an early indication of the future price movement.
Thanks for reading! Keep Learning :)
The first step is to establish a clear support and resistance line. In case of a breakout, I like to keep my target at around the same price difference range between old support and old resistance after it bounces from the resistance.
The crucial thing lies in identifying the candlestick pattern around the support - resistance. In our case, when the price first hit the resistance, it formed a clear Bearish Engulfing and the next time, it formed a healthy dark cloud cover followed by an engulfing. These are clear red flags when a trader should start booking profits.
Similair bullish patterns can be identified at support region like the Morning Star pattern as in the above chart.
In order for the price to give a breakout, Volume & Momentum play a very crucial role. A rising volume with price rise builds momentum, and increases the chances of a breakout. Another important observation is to see HOW STRONG did the PRICE BOUNCE from the support. Long wicks, very less or almost no consolidation around the support and a bounce back from an area above the support instead of retracing all the way back to the support are clear indications of trend reversal from Bearish to Bullish.
Also notice how the candle formed a Morning Star during the bounce, this further strengthens our conviction that the trend is changing.
Observe how the red candles grow smaller and smaller as they approach support, this indicates weakening of the bearish momentum.
Also the Resistance was approached in a very aggressive foray this time with clear long green candles indicating a very strong pent up demand.
I hope this analysis provides some insight into how the Price action gives an early indication of the future price movement.
Thanks for reading! Keep Learning :)
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