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Visual Candle Scanning for Breakout Trades — Part 1

By  +Follow July 1, 2014 7:04AM
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Sorting through hundreds of charts in search of elusive strong breakouts can be challenging. In this series of articles we’ll focus on how to spot momentum breakout trading opportunities using a visual scanning approach designed to help traders narrow their focus to the strongest emerging trade setups.

Visual Candle Scanning Basics

Candles can show the net buying and selling “story over time” of accumulation vs. distribution (buying vs selling), as it relates to price action. When it comes to spotting the strongest patterns, much of it is common sense, using easily-observed patterns that reveal when institutional buying is at it’s strongest (such as very tall green candles). Other patterns are more subtle, so understanding a variety of these trade setups can be helpful.

Pattern #1: Ratio of Green to Red Candles

All uptrends are not created equal; many are significantly stronger (and tradable) than others. A good basic scan is to look at a 90-day candlestick chart, and visually scan to see roughly the ratio of green to red candles. As long as there’s at least 1.5 times the number of green candles to red, during a 90-day uptrend, these are generally strong patterns for long continuation trade setups.

For example, in Figure 1 S&P 500 Index (SPY) , you can visually check the chart and see there’s many more green candles (N = 43) than red ones (N = 21), which meets our 1.5 green-to-red criteria.

 

Fig1SPX.gif

 

Traders get into trouble by overcomplicating their trading plans by trying to outguess the market using risky pivots on questionable, low-volatility charts.

Instead, focusing on those 90-day charts with a healthy “winning ratio” (1.5x or better) of green to red candles can help simplify the approach to trading, to help decide what’s worth considering for a new entry. These charts are relatively easy to spot, using a simple 90-day daily candlestick chart.

Pattern #2: Wide-Range Green Candles In an Uptrend

Having decided now to look for uptrends with a majority of green candles during a breakout, the next challenge is to further whittle down the list of candidates to a more focused watchlist. One of the author’s favorite stock swing trading strategies is to buy .50 (fifty cents) above the high of a “wide range candle” (defined as a candle whose height is at least twice as high as the immediate past prior 2 candles.

In Figure 2 Newfield Exploration Co. (NFX) the first big green wide-range candle occurred near the end of April, as circled on the diagram. Entering on a day subsequent to this led to a very strong breakout continuation trading opportunity in the subsequent weeks following this candle signal.
 

Fig2NFX.gif

Pattern #3: Cups & Candles: Continuations above 50/100/200 MAs

In an earlier article, we described the use of a wide-range momentum candles at the right side of cups. In Figure 3 Weyerhauser Co. (WY) , this pattern is seen twice, as illustrated in the chart below. The 2 signals to look for are 1) a “cup” pattern, which simply looks visually like a large letter “U”, with 2) a wide-range candle at the far right of the cup. The entry, as in Pattern #2, is to enter .50 (fifty cents) above the high of the wide-range candle, for a swing trade.

 

Fig3WY.gif

 

Another confirming technical entry signal is generated when the price action in this chart is above all three 50, 100 and 200 simple moving average (MA) lines, on the 90-day daily candlestick chart. Visually scanning for the best momentum breakout signals is simplified when looking for these strong patterns with the help of daily candle charts, which serve as an institutional “scorecard” for net buying vs consolidation vs sell patterns.

In our next article, we’ll look at additional momentum breakout patterns and how to visually scan for these with the help of daily candlestick chart patterns.

Recommended reading: For more on candlestick charts, learn from the world’s foremost authority and author’s colleague Steve Nison, in his book Strategies for Profiting With Japanese Candlestick Charts (2011, Wiley Trading). For more on using this pattern, see the author’s complimentary Saturday “Trading Week Ahead’ webinar events at DaytradingUniversity.com/free.

Ken Calhoun is a trading professional who has traded millions of dollars of equities since the 1990s, and is the producer of multiple award-winning trading courses and video-based training systems for active traders. He is a UCLA alumnus and is the founder of TradeMastery.com and DaytradingUniversity.com, popular online educational sites that reach tens of thousands of active traders worldwide.  

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions.


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Results for SPY
Jim McT
21 Oct 14 18:24:47
I've noticed quite a few stocks that took the elevator down,actually took the elevator back up! $SPY
♥ @MyOrgone ♥
21 Oct 14 18:24:43
Ditch $KO!! Make 100% a year with our 'Top 10 Hedge Fund' Artificial Intelligence - http://t.co/x7MDlPJXnp @CNBC $SPY
TheHealingBodyDigest
21 Oct 14 18:24:19
RT @philstockworld: The Levels We're Watching and the Positions We're Taking for the Week Ahead: $SPY $DIA $QQQ $IWM $AAPL -- http://t.co…
TheHealingBodyDigest
21 Oct 14 18:23:57
RT @philstockworld: What Lines We're Watching and How to Play them in our Short-Term Portfolio: $SPY $IBM $DIA $IWM $TNA #Hedging -- http:…
David Taylor
21 Oct 14 18:23:12
Yahoo surges on results. Bullish forecast on $YHOO around Alibaba IPO published 3 months ago: http://t.co/ZEHDd6MwYd $SPY
Don Right
21 Oct 14 18:23:04
Yahoo surges on results. Bullish forecast on $YHOO around Alibaba IPO published 3 months ago: http://t.co/TCi0O8nsDA $SPY
Gary Thomson
21 Oct 14 18:22:53
Yahoo surges on results. Bullish forecast on $YHOO around Alibaba IPO published 3 months ago: http://t.co/LddGHsldZM $SPY
Gary Thomson
21 Oct 14 18:22:43
Yahoo surges on results. Bullish forecast on $YHOO around Alibaba IPO published 3 months ago: http://t.co/4hHuYq7Ikz $SPY
MattBurns
21 Oct 14 18:22:31
Yahoo surges on results. Bullish forecast on $YHOO around Alibaba IPO published 3 months ago: http://t.co/RRcnf0xzpS $SPY
PortfolioWorkstation
21 Oct 14 18:21:00
RT @StockTwits: Here's a phenomenal chart. It shows every major v-bottom correction since 2013 -> http://t.co/NAtm06Q85I $SPY
Yemi Karunwi
21 Oct 14 18:20:31
Commented on StockTwits: $SPY $QQQ $IWM Like I mentioned yday short term outlook have turned bullish for stocks. ... http://t.co/Fj9R0hNfr9
Jeffrey
21 Oct 14 18:19:29
RT @philstockworld: The Levels We're Watching and the Positions We're Taking for the Week Ahead: $SPY $DIA $QQQ $IWM $AAPL -- http://t.co…
Jediphone
21 Oct 14 18:17:46
RT @StockTwits: Here's a phenomenal chart. It shows every major v-bottom correction since 2013 -> http://t.co/bbiX71jjFx $SPY
Jennifer
21 Oct 14 18:17:11
RT @philstockworld: The Levels We're Watching and the Positions We're Taking for the Week Ahead: $SPY $DIA $QQQ $IWM $AAPL -- http://t.co…
Jennifer
21 Oct 14 18:16:58
RT @philstockworld: What Lines We're Watching and How to Play them in our Short-Term Portfolio: $SPY $IBM $DIA $IWM $TNA #Hedging -- http:…
brian stu
21 Oct 14 18:15:30
I'm definitely not a commodities guy, but I think we have further downside in oil since it has not participated in $spy swing. JS #guess
artintelbot
21 Oct 14 18:15:15
Ditch $KO!!! Earn 100% a year with our 'Top 10 Hedge Fund' Artificial Intelligence - $SPY http://t.co/V5krQM4XpS
Dieselboss
21 Oct 14 18:14:04
RT @philstockworld: The Levels We're Watching and the Positions We're Taking for the Week Ahead: $SPY $DIA $QQQ $IWM $AAPL -- http://t.co…
Dieselboss
21 Oct 14 18:13:48
RT @philstockworld: What Lines We're Watching and How to Play them in our Short-Term Portfolio: $SPY $IBM $DIA $IWM $TNA #Hedging -- http:…
GBP Fractalerts
21 Oct 14 18:11:21
New $SPY alerts have recently been posted. Check them out now. http://t.co/06obSFSzuk
Fractal Forecasting
21 Oct 14 18:11:04
What is the $SPY going to do next? Get real time alerts and analysis at http://t.co/fRJvNGHFjy
Nathan Klint
21 Oct 14 18:10:17
RT @RyanDetrick: NAAIM going back to '06. Crazy to think, but equity exposure near '09 levels. http://t.co/thPYGHEiVD $SPY
Kyle Lusby
21 Oct 14 18:10:01
RT @philstockworld: The Levels We're Watching and the Positions We're Taking for the Week Ahead: $SPY $DIA $QQQ $IWM $AAPL -- http://t.co…
Samantha Lee
21 Oct 14 18:09:43
"@EuromaidanPress:#Canada fighter jets intercept #Russia military planes @CBCNews: http://t.co/gg3AcHhG16 http://t.co/C01oEsH7eC" $SPY $SPX
Barnabas K
21 Oct 14 18:09:39
Berkshire profit on IBM wiped out over earnings forecast $IBM, $SPY, $DIA http://t.co/yJF8aEHm92 via @SFGate
Kyle Lusby
21 Oct 14 18:09:19
RT @philstockworld: What Lines We're Watching and How to Play them in our Short-Term Portfolio: $SPY $IBM $DIA $IWM $TNA #Hedging -- http:…
Van Castle
21 Oct 14 18:07:13
RT @gtlackey: TP Daily: straight up into the MA Bands, good spot for a rest $SPY $QQQ $IWM http://t.co/xscbJYL5Uk
Buyavette.
21 Oct 14 18:05:33
RT @philstockworld: What Lines We're Watching and How to Play them in our Short-Term Portfolio: $SPY $IBM $DIA $IWM $TNA #Hedging -- http:…
Sheldon McIntyre
21 Oct 14 18:02:56
"@RyanDetrick: Incredibly, the $SPX hasn't had a single 2% up day in '14. Not unheard of ('04/'05), but rare. $SPY http://t.co/ezbZwpD9fi"
Alex Rodriguez
21 Oct 14 18:02:17
RT @philstockworld: The Levels We're Watching and the Positions We're Taking for the Week Ahead: $SPY $DIA $QQQ $IWM $AAPL -- http://t.co…
Me_Sean
21 Oct 14 18:02:09
Discretionary had a strong day relative to staples (+1.1%). One of the pairs we are paying close attention to $xly $xlp $dia $tlt $spy $QQQ
Alex Rodriguez
21 Oct 14 18:01:56
RT @philstockworld: What Lines We're Watching and How to Play them in our Short-Term Portfolio: $SPY $IBM $DIA $IWM $TNA #Hedging -- http:…
Alex Chalekian, CEP®
21 Oct 14 18:01:27
RT @Lake_Avenue: Lake Avenue Market Close Update: #DJIA +215.14 #NASDAQ +103.40 #SP500 +37.27 #stocks #economy #markets #wallstreet $…
Anna Cobb
21 Oct 14 18:00:20
RT @lancejepsen: Institutional Trader Buying Detected on the TICK $SPY $TICK http://t.co/44uuPene5g #StockTrading http://t.co/6gAasBxKdW
Me_Sean
21 Oct 14 18:00:10
Lower oil prices is a pos for Chile. 20% of their inflation is tied to oil/energy. Neg for Colombia 50% of index is hurt. $spy $xle $EEM
Ryan Detrick, CMT
21 Oct 14 17:59:51
Incredibly, the $SPX hasn't had a single 2% up day in '14. Not unheard of ('04/'05), but rare. $SPY http://t.co/0DNLqD2PzS
Patty Oppenheimer
21 Oct 14 17:59:32
RT @philstockworld: The Levels We're Watching and the Positions We're Taking for the Week Ahead: $SPY $DIA $QQQ $IWM $AAPL -- http://t.co…
Momobreakout
21 Oct 14 17:59:03
RT @RedDogT3: Here's a link to today's video recap and look ahead $spy $xle $oih $aapl $baba $twtr $fb $celg. $gild http://t.co/ltgLhYcWl7
1971 Capital
21 Oct 14 17:58:59
not bad....ATA Truck Tonnage Index up 3.7% Y/Y in Sept $IWM $SPY $QQQ http://t.co/Jr0GpiCJNr
Patty Oppenheimer
21 Oct 14 17:58:52
RT @philstockworld: What Lines We're Watching and How to Play them in our Short-Term Portfolio: $SPY $IBM $DIA $IWM $TNA #Hedging -- http:…
Mr Popular
21 Oct 14 17:57:20
I'm waiting for all of the market technicians to tweet out how these moves make sense??? $SPY $QQQ #Crickets
The Prodigy Group
21 Oct 14 17:57:15
RT @IncredibleTrade: $SPY $TWTR Big $ poll very bullish about the outlook for U.S. stocks thru the middle of 2015 http://t.co/T6lkXP0XfK ht…
Dale Brethauer
21 Oct 14 17:57:03
$SPY Trade Returns 92% - Full video Analysis. #trading #options #markets #traders http://t.co/ArPLZFpTPk
Amine Hambaba
21 Oct 14 17:55:25
@TommyThornton same for $SPY correct, I have not applied TD D wave for awhile
Terry Lyons
21 Oct 14 17:54:30
RT @AsianOptionGirl: Commented on StockTwits: we have R3 at $193.55, 21DMA at 193.65, next is $196.80 at 50DMA, then CRASH to $170. $SPY ht…
Van Castle
21 Oct 14 17:54:27
RT @sentimentrader: When the put/call ratio >1 and $SPY >+1.5% during a bull mkt. A week later, it added to gains only 4 times. http://t.…
Suzanne Kantra
21 Oct 14 17:54:23
RT @philstockworld: The Levels We're Watching and the Positions We're Taking for the Week Ahead: $SPY $DIA $QQQ $IWM $AAPL -- http://t.co…
Suzanne Kantra
21 Oct 14 17:54:01
RT @philstockworld: What Lines We're Watching and How to Play them in our Short-Term Portfolio: $SPY $IBM $DIA $IWM $TNA #Hedging -- http:…
G. Thomas Lackey Jr
21 Oct 14 17:53:55
TP 65min: all in strong RSI bull ranges, but getting hot quickly $QQQ $IWM $SPY http://t.co/z6wm4OhdvZ
Samantha Lee
21 Oct 14 17:53:28
hey @jimcramer thoughts on Carl Icahn being 'quite concerned' about the stock market? http://t.co/SnypnBdfto $SPY $SPX
				
				
By  +Follow July 1, 2014 7:04AM
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