Nifty broke out from sideways trend – Now what?

Although we have not been updating this blog frequently, we have been regularly posting on facebook and for those who are following us there, know that NIFTY broke out of a sideways trend on Thurs, 27th Oct, 2011, albeit on thin volume because of Muhurat Trading. On Friday, the NIFTY suddenly opened higher and closed at 5360, up almost 3%.

Is it too late to get in because you have been waiting on the sidelines? Here is our take:

As shown in this image, NIFTY had a resistance at 5343, and it closed above that. But, it has a pretty strong resistance at 5400 level and also there is a long-term downtrend line that it needs to penetrate and break before any long-term uptrend can start. Although the market appears to have started a new short-term uptrend, it might be difficult to make money directly being bullish on NIFTY because of it being so close to these strong resistance levels.

What usually happens when the market goes in a new uptrend is that you start seeing lots of stocks breaking out of resistances on high volume over the next few days. So, if you focus on such stocks, you can use a “Volume Breakout Strategy” to identify and get nice gains. At the start of new bull markets (although this is in no way a start of a new long-term uptrend), this works great and can help you identify stocks with 2x to 4x gains very easily. This is a strategy that we’ve adapted from William O Neil’s strategy of trading on “New 52-Week Highs”, which we feel causes you to miss out on getting into some winners early. In this strategy, you are basically trying to buy stocks that are breaking out of resistance on high volume. What you have to do is as follows:

1. In Investar, focus on all “Gainers on Strong Volume” scans and “New High” scans.
2. Based on End-Of-Day, identify sound stocks that are breaking out of clearly defined resistance levels.
3. If they are not too extended (meaning not too much beyond their resistance levels, i.e. within a few % of the resistance level, buy them). Attendees of  our “Basics of Technical Analysis” webinar will remember this as a Buy signal based on “Break of Resistance”.
4. Sell when you get a sell signal based on a support or a trendline breakdown.
5. Hint: If you want to identify stocks breaking out of Daily Charts in intraday,  you should focus on the “Daily Timeframe” scans. For details, see the video: “Using Daily Timeframes for identifying Volume Breakouts”.

We’ve shown the process of looking for such stocks in this youtube video. The video shows e.g., that ABAN has a better looking volume breakout compared to others like JINDALPOLY. Another thing that is clear is that not many stocks appear to be breaking out of sound bases (Usually at the start of a bull market, you will see a lot of stocks doing this). That’s the reason why we feel this is a short-term uptrend, so you have to proceed with caution and put stop losses accordingly.