Breakout or Fakeout? Part 3: Trading Consolidation, Cup and Candle Breakouts

Ken Calhoun |

This series of articles is designed to show active day and swing traders how to avoid false breakouts. In this article, we’ll be looking at how to trade specific intraday breakout patterns using 1-minute candlestick charts. Using a combination of specific patterns when identifying entries can be helpful in both entering high-probability breakout trades as well as potentially avoiding false breakouts.

Entering Following Ascending Triangle Consolidations

Many traders get into “fakeout” false breakout attempts because they enter too early. Trading new entries following “obvious” breakout patterns can also get traders into trouble, if they pull the trigger too early in a new trade. In Figure 1, [Valeant Pharmaceuticals (VRX)] there’s an ascending triangle consolidation with resistance at the 51.8, above which a breakout entry is a good place to enter the trade.

Valeant Pharmaceuticals vrx(Click to enlarge)

A secondary entry is above the “micro cup” breakout over the 52.4 entry. The later in the session a breakout occurs, the weaker it tends to be. The best entries are made from 9:40am-10:15am EST for intraday consolidation breakouts. When looking for entries above ascending triangles, it’s best to see the whole real body of the 1-minute candlestick chart completely close above the obvious horizontal resistance line, to show there’s strong price action for a momentum breakout long signal, as in Figure 1, where the long signal above consolidation proved to be a successful entry trigger for a new entry.

How to Enter With “Micro-Cup” 1-Minute Patterns

Looking for a sequence, or series, of long “micro cup” patterns is an extremely useful intraday and swing trading tactic for active traders. A “micro cup” is defined as one that lasts for anywhere from 5 to 45 minutes on the 1-minute intraday chart. Setting entry triggers just above the high (for longs) of micro-cup pattern breakouts can provide strong entries, when done correctly.

Two of these “micro cup” breakouts have been identified in Figure 2, [Proshares Ultrashort Silver (ZSL)], above the 8.6 and 9.0 resistance thresholds. From a risk management standpoint, it’s usually wise to set a hard stop at just under the cup breakout threshold, by .1 - .2 (ten to twenty cents) for day trades. For swing trading, a loss of the prior day’s high (or no more than 1.5 points maximum) can be an effective strategy in keeping stop losses to a minimum.

Proshares Ultrashort Silver ZSL(Click to enlarge)

Using these “micro cups” can be a powerful tool in identifying breakout entries. As noted in earlier articles, for higher priced instruments ($20-$150/share), it’s often wise to use a “false breakout filter” of around .35 (thirty-five cents) above the cup high, before entering. For cheaper instruments, like the ZSL Figure 2 chart, a .10 (ten-cent) false breakout filter is used. The goal is to not enter during a “handle” consolidation on the right side of the cup, instead waiting for it to break free of consolidation and start reaching new highs, at which point the trade is initiated.

Using 1-Minute Candlestick Charts: Hammer Pivots and Cup High Breakouts

When scanning for new trade entries, it’s often useful to see whether or not there’s a hammer on the 1-minute chart to indicate a potential low, after which the instrument being traded may pivot to the upside, for a continuation breakout. In Figure 3, [ITT Corp. (ITT)], a hammer is seen at near 23.7, after which a cup breakout above resistance near 23.8 is observed.

ITT Corp. ITT(Click to enlarge)

Scanning for these hammers following a drop in price can often provide good entry signals. Experienced traders can enter a few cents above the high of the hammer (which would be 23.75 in Figure 3), while newer traders may want to wait until after a “micro-cup” is completed, prior to entering the trade (in this instance, that would be over the 23.85 area). Either way, using both signals together can help identify potentially successful trading entries for active traders.

Avoiding False Breakouts with Cup Patterns

It’s important that traders have a keen sense of the price elasticity, based on the Average Trading Range (ATR), also known as the Average True Range, of the instrument they’re trading. It’s not smart to enter a new breakout following a cup if the trader is “late to the party” and the instrument has already moved to near it’s ATR for the day, at the time of entry. That’s why entries done in the first 30 to 45 minutes are often the best trading setups, for both intraday and swing trades.

Another caveat is that cups need to be well-defined, meaning they look like the letter “U” and are sharp and easily-recognized. Choppy consolidation cups make for poor entries. Well-defined “clean” micro-cup breakouts are best for new trade entries.

The proper use of cups, consolidations and candle chart breakout patterns can be an effective combination for active traders, to potentially capitalize on new breakout entries as they happen in the markets.

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 DaytradingUniversity.com, a popular online educational site for active traders.

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. To read our full disclosure, please go to: http://www.equities.com/disclaimer

Companies

Symbol Name Price Change % Volume
VRX Valeant Pharmaceuticals International Inc. 15.45 0.14 0.91 8,596,498
IMKTA Ingles Markets Incorporated Class A Common Stock 45.30 -0.65 -1.41 31,422
ITT ITT Inc. 41.25 -0.71 -1.69 816,784

Comments

Emerging Growth

Beleave Inc.

Beleave Inc is a biotech company. The Company is engaged in the production of medical marijuana under the Marihuana for Medical Purposes Regulations outlined by Health Canada.

Private Markets

Ozobot by Evollve Inc

Ozobot is a world leader in compact super intelligent robots that entertain and educate through fun interactive gaming.

Pinterest

Pinterest is a visual discovery and planning tool. Users ("Pinners") use the site and apps to get ideas for their future, such as recipes, places to travel, and products to…