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      Daily Blog - Tiger Software

                            November 15, 2007

    How To Spot Them and Handle Them

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William Schmidt, - Tiger Software's Creator
      (C) 2007 William Schmidt, Ph. D.  - All Rights Reserved. 

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     The advise offered here should be of considerable help.
     Many years of trading have taught me what I write here.
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      to william_schmidt@hotmail.com

                    FALSE BREAKOUTS:

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How To Predict and Spot Them.
                                           How To Profit from Them.

Traders will inevitably find themselves owning a stock that
                           makes a false breakout like the ones show below.  The hardest part
                           will not be in spotting the falseness of the breakout, but in getting
                           yourself to take a small loss.  This is essential money management.
                          Take the loss.  You can always buy the stock back if it makes
                          a subsequent high.  The danger of a 33% loss or more is quite high.
                         Savvy traders look for these patterns to short.  They know the
                         breakout has already forced the more nervous short sellers to
                         cover.   Without short sellers to cushion the decline, prices
                         can fall a long way.

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                  False Breakouts above Flat Tops Are Obvious and Often Very Bearish.

PAAS had already doubled in 7 months.  That made the March breakout late.  20 is often
           a significant psychological price barrier.  The negative (red) Tiger Accumulation Index showed that
           insiders were heavy sellers before, during and after the brief breakout in March. The plunge
           on heavy volume below the 50-day ma proved the stock was in trouble.  It subsequently lost
           50% of its entire advance from 8 in July.  This chart shows that OBV did confirm the breakout.
           It was the Tiger Accumulation Index which gave you the best clue that the breakout was false.

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                                              BASIC TECHNICAL ANALYSIS

                Good technical analysis requires a mastery of the concepts of support and resistance.

      Inspecting charts,  you will often see very traceable lines of support that go through a
      series of lows made by the stock, index or commodity.   Oppositely, a resistance line goes
      through a series of highs.  Some people use closing highs and lows to develop these
      important lines.  I have found intra-day highs and lows often make better lines, but it's the
     closings that must move past the line for a breakout or breakdown.  The support level may
     have to be tested many times before a rally ensues.  But once the support is seen as reliable,
     prices typically get bid up to the overhead resistance line, if present.  Similarly we see prices
     sag once it becomes clear that a stock, index or commodity cannot get past a resistance
     point.  In this case, prices usually fall back to the most reliable line, or, sometimes, zone of
     support.  The DJI chart of 1986 shows the importance of recognizing support and resistance.  

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               At some point the support or resistance level is overcome.  The company's earnings picture
       changes, new players come onto the scene, the Fed takes a different tact: all these and many
       other pieces of news or developing stories can cause price breakouts or breakdowns.  Prices
       breakouts or price breakdowns usually bring a speedy move away from the previous trading
       range or price hesitation pattern.  After the breakout, prices are expected to move up or down,
       at a minimum, the height of the previous trading range.  Many times they move up much
       further.  And the breakout run are often very fast.  This is why breakout playing is so popular.
       Investors Daily has devoted whole segments of its newspaper to this concept. Breakout buying
       has a long history of successes, but no where more so than in long bull markets.  Read what

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       Jesse Livermore and Nicholas Darvas wrote about this exciting way of trading.

"Jesse Livermore noticed several things about stock market leaders in an up trending market. Their price
                 kept going up. That’s how you make money. He would look for industry groups that were leading the market
                 and trade only the leaders of that group. This made perfect sense. A leading industry group means only one
                 thing: there are more stocks going up than other groups. Not rocket science, but when you're risking your
                own money, you don't want it to be. By trading only stocks in a leading industry group you can focus on that
                small subset of stocks actually rising. He avoided weak stocks and their industry groups. The probabilities
                were too great of losing money...
                    "If Jesse found a stock he liked, he would decide in advance how many shares he’d buy. If he decided
               to buy 400 shares of AAPL, he’d first purchase 100. If the price increased, he’d buy another 100; then finish with
               a purchase of 200 shares if it kept rising. He needed confirmation that a stock would make him money. What
               better way to confirm a stock price is going up…than if it’s going up."

http://www.learnstockmarketlegends.com/jesse-livermore.html )

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              Read the reviews of the books by Darvas on Amazon.

                                    All New Highs Are Not Breakouts 

New highs do not necessarily entail a Breakout past well-tested resistance.  There are
        many more new highs that there are breakouts past a horizontal line drawn through at least
        3 previous highs.  It is breakouts that we are most interested in.  But Tiger's internal strength
        indicators validate new highs generally.
  MTH below made a new high, but had no flat well-
        tested resistance that it moved above.   So, it was not a "breakout" on 12/6 as we use that term. 
        Nevertheless, the falseness of its rally can be seen in:
                       1) OBV did not make a corresponding new high.
                       2) The Tiger Accumulation Index was less than half of what it was 2 months' earlier.
                       3).   The ITRS (Relative Strength) did not confirm the new high and was an insipid   .-3

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                                          Authenticating Breakouts

                Please see the discussion of this topic I began here on October 28, 2007.

               TigerSoft and Peerless make much of breakouts and how to authenticate them, so that
       we can buy the strongest of them and avoid the ones that fail.  Breakouts and breakdowns
       are most reliable when the stock moves in the direction of the overall market.  Thus, a young
       bull market with growing numbers of daily New Highs is very beneficial to the breakout Buyer.  
       An aging bull market, or one that is ending, shows many more false breakouts.  In fact,
       when you spot a number of false breakouts, you should immediately consider the likelihood
       that a severe correction or a bear market may be beginning.

              The best price breakouts are also usually confirmed by a surge of volume.  Our Tiger
       Charts show increases of volume by making the price bar red for that trading day.  Price gaps
       also make a breakout or breakdown more reliable.   

The Tiger Charts let you authenticate breakouts by showing a variety of internal strength
       indicators, the majority of which should be making a new high when prices breakout to new
       highs.  The same thing is true in reverse.  On Balance Volume should confirm a new high.  This
       measures aggressive buying.  When it does not, a pullback is often seen. 
See the chart of SSRI
       below.  The Black OBV Line failed to confirm the stock's recent price breakout over 40.  The
       Accumulation Index was positive and did reach the levels of the old highs.  The ITRS (Relative
       Strength) definitely confirmed the breakout. 

   -----------------------  SSRI: Example of Breakout and Pullback ------------------------------------------------------------
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             A true price breakout may still retreat without achieving its price objective.  But the
       best breakouts advance 10% to 30% very quickly and fulfill their minimum price objective,
       sometimes in only a few days.  In the chart above, I would take the previous trading range
       to be 14 point high, 40-26.  If we consider the price breakout to be 39, then the height
       of the earlier pattern sets up a price objective of 39 + 14, or 53.  SSRI still has more upside price
       action ahead.

              Broken Resistance Becomes Support.  Note the breakout at 31 in July was confirmed by
       all our key indicators.  In August prices did pullback to the point of breakout.  The retreat
       quickly found support.  The ITRS stayed very positive.  The Accum. Index turned only
       slightly negative.  Soon prices burst upwards to a new high on (red) high) volume and moved
       much higher.  Any inspection of charts in a rising general market environment will produce
       hundreds of examples of pullbacks to the support of earlier breakouts, just like this.

      ========= ABX Breaks our, Tests Point of Breakout and Rises Sharply. ===============      

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                                                           BREAKOUT FAILURES

                     Breakouts do sometimes fail.  In these cases. prices move up a little and then
          within a month or two, fall back below the point of breakout.  This usually occurs
          because the general market has faltered, because bad news has broadsided this
          particular stock market or the stock has been manipulated to force a short covering rally.
          In all three cases, the stock's initial move up has caught unsuspecting bulls.  And
          as the stock declines, they will dump the stock if they are traders, rather than let losses
          run or they will wait and wait to get out even, thereby constituting resistance for
          next rally up to the point of breakout.  When we look through old charts, we see
          very few cases like the ones below, where there is a truly false breakout above a
          well-defined, well-tested horizontal resistance.  They are rare.  But here some
          cases to study.

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                        Traders Must Sell on A Clear Breakout Failure.
                          Very Aggressive Traders Should Even Sell Short.

               The examples above show holding a stock that breaks out and then
          quickly retreats back below the point of breakout on a closing basis by
          a few percent is a lot better tactic than hoping somehow the breakout
          failure is an illusion.  It will help you to see that most false breakouts
          have internal strength indicators which did not confirm the breakout.
          Consider the possibility that the stock broke out on a day when
          the biggest players were absent, that the breakout was artificial in the sense
          that it was chiefly the result of buying from people reading charts (!?)
          and that it may signify an important turn downwards by the market,
          or, at least, the industry that the stock was in.


           Internet Search: "False Breakouts".    

                     Diagnal breakouts like the one below are more suspect than breakouts above flat tops.   
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                      This writer says that such breakouts need to be confirmed by the Gold Stocks Index (XAU)
             putperforming Gold (GLD),  :RSI and  MACD positive.
             ( http://www.financialsense.com/fsu/editorials/gnazzo/2007/0713.html   )


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