The Anatomy of a Breakout

Yesterday, one of our positions, RDFN, broke out and gained almost 5% in a day while the rest of the market played dead for the entire trading session. Given that we only manage a handful of positions at a time, how are we able to pick fast movers in an otherwise dead market? Let’s take a look.

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We picked up RDFN a week ago, before the initial breakout, purely due to the wedge it was forming. This wedge was especially appealing because it bottomed out right at the short term support of the stock. The bottom in this case is signaled by the skinnier, consolidated candles at the end of the wedge. A more bearish-looking setup might have been a wedge that never found a bottom, or one that had more volatile price action.

In general, when a stock’s price action gets “quiet”, big moves tend to happen. With the stock resting at support in a descending wedge, there was a high likelihood that the move would be up rather than down.

A day after the initial breakout, the stock “retested” the previous close, erasing almost all of the gains from the previous day. This is standard for any good breakout, and confirmed we were correct about the price movement, which is why we added even more to this position on the retest. The retest is meant to scare off the weaker hands, specifically investors who tried to chase it up on the initial breakout. The easiest way to avoid getting shaken out on a retest is to buy before the breakout, not during it. As tongue-in-cheek as this statement is, it puts a spotlight on our entire strategy --

Our main emphasis has been buying on the low end of the range, rather than chase something headed up. This takes a tremendous amount of patience, but pays off enormously. Buying at support decreases the emotion you might feel on a retest, and gives you peace of mind that there is a low probability of it going under previous support levels. If it does, you just sell it and move on, simple as that. 

While we don’t have exact predictions on how high this might go, or if it will retest further, it’s nice to see one of our favorite technical setups play out as planned. If you aren’t a premium member and didn’t get a chance to grab this before it went, be patient. Look for setups like this one and buy at the right time, we don’t advise you chase RDFN after the move it made yesterday. 

Happy Trading

- The Minotaur Team