≈ Patience pays, but…≈
Yesterday we explored using a price filter to weed out fakeouts. Today we’re looking at time filters.
If a stock breaks above resistance but only remains there for five minutes before plunging back below the ceiling, then was it a legit breakout?
True breakouts break and stay above resistance. Thus, a simple way to determine if the breakout is legit is to give it time. A stock that remains above resistance for five days is more likely to pave the way for higher prices than one that stays above resistance for five minutes.
But here’s the wrinkle.
If you’re going to buy the breakout, you can’t wait for five days because you will miss the trade. In that situation, you’d have to wait for the following swing setup to trade (such as a pullback).
If you demand time confirmation before buying, then I think the most logical technique is to wait for a stock to CLOSE above resistance instead of buying it when it MOVES above resistance intraday. You might end up paying a higher price, but you’ll at least be able to argue you had more confirmation.
Ultimately, this is the tradeoff with the time filter. More confirmation usually comes with a worse price. You’ll have to decide how to strike the right balance properly.
Chart of the Day
IWM Daily Chart
On April 23rd, 2021, IWM knocked on the door of a breakout over $227. What would I want to see to confirm? First, the price surge well above $227 (price filter). Second, the price stays above $227 for days, weeks, and hopefully forever (time filter). Third, a groundswell in volume to show institutions piling in.
Video of the day
Coach Tyler brings his Jedi skills in the options market to analyze two different strategies – the Long Call v. Bull Call Diagonal – on a setup on $NUE in this clip from Wednesday’s Halftime Report
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