[isatrader]

Hello again, Had a question about buying the pullback after a breakout. Easiest to use a couple of examples from the investor method watchlist. Would a volume validated breakout that then substantially pullsback on low volume be generally viewed as a nice discounted secondary entry point for an investor or is it considered somewhat of a failed breakout? SMTX had high volume breakout followed by 4 of 5 days of low volume pullback where price dropped below breakout price, put in the context relative to down week for the market. Or would seeing a consolidation pattern like SIMG and looking to enter above consolidation range be wiser? Essentially at what point is a high volume breakout considered failed?
Thanks

Hi boondock,

SMTX attempted to make a Stage 2A breakout back in January, but failed to close the week strongly above the breakout level, and formed what is referred to by some as a squat, and so remained in Stage 1. It then pulled back sharply the following week back into the Stage 1 range. I highlighted it again on the 7th March as it was once again testing the upper part of the Stage 1 range, and so would have been given a Stage 1B rating. However, it once again failed to make the Stage 2A breakout and pulled back sharply again into the Stage 1 range. So I'd give it a Stage 1B- rating now, as the technical pattern isn't as good now. It could still make another attempt at moving into Stage 2A, but would now need a weekly close above the January high of 2.66 imo.

   

Malcolm, asked whether the initial breakout was the one before the end of November last year, but that breakout would only be considered a breakout within Stage 1, as SMTX was still trading below a lot of near term resistance at the time, and there wasn't much of a base to speak of, and so in this case it's formed a higher Stage 1 base which often happens in stocks with a lot of near term resistance, as they need time to work off the supply. Attached is the weekly chart again, but with the ichimoku resistance cloud overlaid, so you can visualize the potential resistance area.

   

boondock, to your question about the Secondary entry point following a Stage 2A breakout. This never occurs in a matter of days, as price often rises for a month or more on increasing volume before beginning to pullback towards the breakout level on contracting volume. So it can often take many months and wipe out the entire initial advance, which is why the Stage 2A entry point is mostly for investors, as traders should focus more on continuation breakouts already in Stage 2.

So to be a successful Stage 2A breakout you'd want to see price rise for many weeks on increasing volume following the breakout, but if it immediately reverses the following week and falls back into the range then you've likely got a failed breakout, and so would dump it immediately.