If you follow my blog: I keep highlighting breakouts from time to time. Some of them work and some don’t. But is it that simple. No. Here’s one case study on how breakouts should be followed and when one should define it as complete failure/success.
IPCA Labs: Breakout Case Study
Here’s the weekly chart: IPCA Labs has been trying to break past 350 for long time and it did in May 2012 but with limited success
I did cover IPCA Labs when it broke out above 350. Lots of you wrote me emails on your frustration with the stock when it failed to follow through and what to do. I was as confused as all of you though I always give 5% margin of error below breakout point but sometimes that becomes too big a risk for some traders.
But lets study the stock objectively..Here’s the daily chart
As you can see in the chart above: IPCA Labs broke out above 350 quite convincingly during May01-15 period but then could not follow through. It declined more post its slippage below 350 [blame it on market condition, Stop Losses] and tanked to 100 dma. It even pierced below it but then the real buying force reemerged and took the stock higher even above breakout point. The stock now is trading at 394 much higher than breakout point of 350.
What this means: The breakout should be looked in overall context. When markets are weak and trading sideways: one should have more patience with breakouts and instead of just jumping out on lack of follow through: one should wait for more evidence before making a final call. In this case – it was support at 100 dma.
Is IndiaBulls Financials going the IPCA Labs way?
Indiabulls Financials has been on breakout radar for sometime and so its breakout above 240 was cheered…
But as you can see in the chart above: the stock has failed to follow through and slipped below 240. It looks like the stock will slip some more to 100 dma i.e. 224. So, again lots of nervousness on what may happen to this breakout…BUT may be this is more reflective of the prevailing market condition and there is very little one can do about it.
I hope the article is making sense