What is a Breakout?
Breakout is an event when stock breaks a well defined resistance by making a big candle move on above average volumes. The important thing - Well defined resistance which post breakout becomes the support
The ultimate support in Breakout is the moving average on which the stock took support prior to breakout. Hence, a breakout watcher should always keep an eye on that level.
Let's analyze HPCL breakout -
As you can see in the chart above: HPCL broke out above well defined resistance of 894 with a large candle and above average volume. It fills all the check boxes of a classic breakout. Also, prior to breakout - the stock took support at 50 dma. Hence, as long as stock holds 50 dma - the structure of the breakout will be considered intact. The stock has two levels of support - one near 895-900 and if for some reason - the stock cracks - the ultimate support lies at 50 dma.
When it comes to trading - HPCL Bullish trader would consider current pullback to near 895 as attractive knowing fully well that he might have to hold the stock as long as it trades above 50 dma.
Breakouts do not produce instant results. Hence, as a student of market - all one should watch - Is stock holding important support area? If stock behaves well post breakout - then patience is very well rewarded. The problem is rarely with breakouts. Lots of times, it's lack of patience that becomes the problem. Post breakout - the management of the trade is all about keeping a close eye on the structure of the stock. Always remember, in market - there is no guarantee. The breakout only communicates that stock is ready to run but there is no guarantee.
Disclaimer – The state of the market notes is Deepak’s perspective on the market. The column is purely for educational purpose. Nothing contained herein is a solicitation to trade or a recommendation of a specific trade. By reading this publication you agree to make no trade relying in whole or in part on the comments of the writers