How to identify Good Volume Breakouts

Posted by hpatil on 28/03/2014 0 comments

At investarindia.com, one of our favorite buying strategies is the volume breakout strategies, so
much so that in the past also we have blogged about it. But considering that the Nifty started a
new short-term and long-term uptrend in March, in this post we will try to go into even more
specific guidelines on how to identify good volume breakout candidates.
In a previous post, we had highlighted 2 factors that are very important for ensuring that a
resistance level is strong (and hence the break of that resistance is important and significant).
These were:
1. The number of touches on the resistance.
2. The volume at the time of the breakout.
A stock is said to break out on strong volume, when a strong resistance is broken on high
volume. In other words, both the factors above should be present to ensure that the chances of
success for the trade are high. There are many other factors that are important (and we cover
them extensively in our Basics of Technical Analysis webinar in fact almost half the 5-hour
webinar is spent on just Support/Resistance/Trend Analysis and the Volume Breakout strategy ),
but these are the most important.
What should be your entry point when a stock breaks out? Ideally, it should not be the exact
resistance but a little bit above resistance (say 2-2.5%). This is to avoid false breakouts, as many
times a stock will breakout, and soon come back down. We call it a fakeout tolerance, i.e. a
tolerance to avoid false breakouts.
What are the other factors to consider when ensuring the volume breakout trade is successful?
1. The number of touches should be high and the resistance should be well-defined.
2. The volume should be high on the day of the breakout compared to the 50-day moving
average, the higher the better. (In Investar, it is very easy to see this number as Vol%, and
it is defined as (todays volume*100 /50-day average volume)
3. Before the breakout, if the stock has gone down on low volume, its a plus.
4. Make sure there is a good risk/reward ratio. Ideally, I recommend a 1:3 ratio. e.g., lets
say the resistance breakout price is at Rs 100, and you purchase the stock at Rs 102 (2%
tolerance). And lets say you put a stop-loss at 7%, then it makes sense to take the trade
only when your potential reward (i.e. the next target, which incidentally is the next
resistance, is Rs 124 and above and gives you atleast a 21% gain (7/21 = 1/3 risk reward
ratio).
5. Timing of the trade. Its generally a good idea to start looking for breakout buys at the
start of new rallies (long-term, short-term or intraday). e.g., as our recent post indicated,
the Nifty broke its all-time high on both the Weekly and Daily chart. This indicated a
start of both a short-term and long-term uptrend and hence a good time to start looking
for volume breakouts.
6. For short-term and long-term breakouts, it also helps if the fundamentals are good. This
post explains how to pick growth stocks using good fundamentals.
One of the challenges for finding volume breakout stocks is that if you use the EOD screener to
identify volume breakouts, a lot of the stocks have gone up much beyond the 2% above
resistance entry point and are difficult to enter afterwards. We introduced the Daily timeframe
scans in Investar just for identifying such stocks. When you set the Investar Scans/Advisor
timeframe to Daily, the software scans in the Daily timeframe, but uses the current days
candle also for scanning. This facilitates finding new highs and gainers on strong volume in
intraday and hence helps indentify volume breakout candidates which you would otherwise miss.
This was best demonstrated in a webinar we did recently (called Using the Intraday Screener
and Scan Alerts on March 27th, 2014 you can download the webinar recording here), where
we conducted a webinar in Live Market and one of the things we focused on was how to pick
volume breakout stocks for short-term and intraday. In this webinar, we highlighted the
importance of using the Daily timeframes also for finding out breakout candidates. One of the
stocks that we picked for a short-term breakout using the Daily Timeframe scans went up by
almost 10% in a day. We found this stock in the Daily timeframe scan when it was at Rs 308,
and it had shot up to Rs 316 by the end of the 1-hour webinar and to Rs 340 by the end of the day
(and as you can see from the chart, it would have been difficult to enter this trade if you only
used the EOD screener). It satisfies points 1,2,3 and 5 that we listed above :

NAVINFLUOR breakout - identified using Daily timeframe scans
As you might have rightly guessed, you need to be able to predict the support/resistance levels
properly in order to find good volume breakouts and set proper profit targets! In fact,
mastering Support/Resistance Analysis is extremely important if you want to be a good
Technical Analyst because it is indispensable for not only setting profit targets, but also exact
entry and exit points, setting stop losses, etc. So much so, that we feel that you should not enter
the market without doing proper Support/Resistance Analysis and Trend Analysis of Nifty or
Sensex. If you need help in perfecting the art of drawing support/resistance levels, you should
consider attending our live webinar, Basics of Technical Analysis, where we go through these
aspects in great detail in a live interactive setting showing you practical examples of how to
enter, how to exit, how to set targets and stop/losses, how to calculate risk reward ratios to come
up with better trades etc.
How to identify and use Support/Resistance Levels
Posted by hpatil on 20/03/2014 0 comments
Support/Resistance Analysis is one of the most important aspects of Technical Analysis. It is
used to determine when to buy, possible targets, stop-losses etc.
Lets first start with the basic definition of support and resistance.
Support: An area on the chart where buying pressure overtakes selling pressure and the market
reacts higher. It is identified by troughs or previous lows on a price chart.
Resistance: An area on the chart where selling pressure overtakes buying pressure and the
market reacts lower. It is identified by previous highs or peaks in the price chart.
A simple way to depict the support and resistance is as shown in the figure below (this type of
price action is also called a sideways trend in Technical Analysis where the stock is fluctuating
between the support and resistance).

Support and Resistance
Based on the definition, when you want to draw a support line, you draw it through the lows of
the price chart. But things get a little complicated because not always will all the lows align well.
In that case, it is considered perfectly okay to draw the support line through the lows and if a low
penetrates the support line, its considered okay as long as the close is not below the support line.
Similarly, when you want to draw a resistance line, you draw it through the highs of the price
chart. But if a high penetrates the resistance line, its considered okay as long as the close is not
above the resistance line.
This is best illustrated in the recent Nifty chart where on the weekly chart, we did not have a
break above the 6340 on the week ending 13th December, even though the Nifty made a high of
6415:

Resistance Breakout in Nifty Weekly Chart
But how are support/resistance levels used in trading? That really depends on what kind of trend
is existing. If it is a sideways trend, you buy at support and sell at resistance (as shown in figure
below). If however, you want to buy a stock (which is usually at the start of a new uptrend), then
you would do that when the resistance is broken to the upside. And if you want to sell a stock,
you would do that when the support is broken to the downside. The techniques for using the
support/resistance in trading are summarized in the figures below:

Using Resistance and Support for Buying

Using Resistance and Support for Selling
Once all the support/resistance lines are drawn the next step is to judge the strength of different
support/resistance levels, how do decide which one to trade on? What if two support levels or
resistance levels are broken at the same time? Which ones do you use in your trading then?
For that, we need to understand the factors that contribute to the strength of a support/resistance
level so that we can decide how much importance we can give to it:
1. How many peaks or troughs does it touch? The more the touches, the stronger it is.
Intuitively, this is because if a support/resistance line is tested a multiple times, the
chances of success on a breakout also go up.
2. Is there a volume accompanying the support/resistance break? The stronger the volume,
the stronger is the breakout and the lesser the chances of failure.
Both the points above constitute what is called the volume breakout strategy, where you enter a
security when the resistance is broken on volume. But we will cover that in a separate post in the
future.
Nifty broke out of its all-time high. Is it a start of a new Bull
Market?
Posted by hpatil on 10/03/2014 1 comment
Last week the Nifty broke above the weekly resistance of 6340 emphatically and closed at 6526,
a new all-time high. The rise is attributed to the strong chances of a stable government under
NDA after the elections. The volume was very strong when the breakout happened on Friday (as
shown in the Chart below):

Nifty Weekly and Daily volume breakout
We have two observations to make that indicates a start of a new long-term uptrend (see attached
chart):
1. 6340 resistance was a very strong resistance (based on the number of touches there are
5 touches as visible in the chart below, our Basics of Technical Analysis webinar
attendees will recall how these are found)
2. Volume was also unusually strong on the day of the breakout, i.e. Friday. Both the facts
above are a very positive sign and an indication that the breakout is strong and the
chances of success of the rally are high.
As the Weekly and Daily chart shows, the action on 9th March, indicates a start of both a short-
term trend and long-term trend and hence would be a great time to start looking for volume
breakouts. The beauty of the volume breakout strategy (as described in this blog post) is that you
can use the volume and new-high scans to search for stocks that are breaking out and almost
every day you will find new ideas if you were to use a good scanning tool like the one in
Investar. You can continue doing that every day after the start of the uptrend, as not all stocks
start rallying at the same time. You enter a stock only when it breaks out on strong volume.
Obviously the Screener is an important tool to have when you want to use this strategy. Here are
some short-training videos that can help understand how to use the Investar Screener and Scan
alerts. We are also planning to conduct some webinars on using the intraday screener in the
future.
IPhone/IPad app with Technical Analysis Add-On Now
Available!
Posted by hpatil on 28/02/2014 4 comments
We are pleased to announce that our IPhone/IPad is now available in the iTunes App Store with
the following features:
Interactive candlestick charts
Automatic 5-min realtime updates in charts
Technical Indicators (EMA, SMA, RSI, MACD, Stochastics, Volume).
Innovative zoom functionality (Gesture or Pinch Zoom, Zoom Area, Zoom In and Zoom
Out).
Pivot-based Support Resistance Levels in chart.
With this release our IPhone/IPad app will have all the features that our Android app has and
some others like Gesture Zoom and Zoom Area ( Gesture or Pinch Zoom and Zoom Area will be
coming soon to Android).
Coming Soon: Investar for IPhone/IPad with interactive
candlestick charts
Posted by hpatil on 23/01/2014 0 comments
We will be soon be coming out with a totally re-vamped app for the IPhone/IPad with the
following features:
Interactive candlestick charts
Automatic 5-min realtime updates in charts
Technical Indicators (EMA, SMA, RSI, MACD, Stochastics, Volume).
Innovative zoom functionality (Gesture or Pinch Zoom, Zoom Area, Zoom In and Zoom
Out).
Pivot-based Support Resistance Levels in chart.
With this release our IPhone/IPad app will have all the features that our Android app has and
some others like Gesture Zoom and Zoom Area ( Gesture or Pinch Zoom and Zoom Area will be
coming soon to Android).
Stay tuned!
Introduction to Options
Posted by hpatil on 22/01/2014 0 comments
This article gives an introduction to Options and serves as a beginners guide to those who want
to explore them.
Just like Futures (which we covered in a previous post), options are derivatives that are traded on
an underlying stock (in case of an NSE stock). A lot of beginners get attracted by the huge
potential returns and jump into option trading with the hope of getting rich quick! This article
hopes to demystify options and ensure that you trade them properly.
An option can be of two types, American or European. Owners of American-style options may
exercise at any time before the option expires, while owners of European-style options may
exercise only at expiration. In India, the NSE stock options are American style and can be
exercised and sold at any time before expiration, while all index options are European style and
can be exercised only at expiration.
There are two types of options one need to understand: call and put. A call buyer is betting that
the stock is going to go up in the future, and a put buyer is betting that the stock will go down in
the future.
When you buy a call option, it gives you a right to buy a stock at a certain price (called the strike
price) before a certain date (called an expiry date). The expiry date for all listed stock options in
the India States is the last Thursday of the contract month, which is the month when the contract
expires. However, when that Friday falls on a holiday, the expiry date is on the Wednesday
immediately preceding the last Thursday.
In most cases though, buyers do not want to exercise the right to buy/sell the shares and end up
selling/buying the option itself for a gain or loss. So, how does one make or lose money if INFY
goes up or down. It is very simple actually.
Lets a call option as an example. e.g., say you are bullish on Infosys (INFY) and think that it will
go above 6400 by February end. You could buy one contract of INFY-FEB14-CALL-3800,
which would basically give you the right to purchase one lot of INFY (i.e. 100 shares of INFY)
at the strike price of Rs 3800 on the expiry date. Lets say the CALL buyer purchased the INFY-
FEB14-CALL-3800 on 21st Jan 2014 at the closing price of 71.
There are 3 scenarios we need to look at:
Scenario 1: On the expiry date, if INFY is trading at 3900, then the call would be worth Rs 100
(3900-3800) at expiry (because if you were to exercise your right to buy, you could buy INFY at
3800 and sell it in the open market at 3900 and make a Rs 100 gain). Hence the gain would be
(100-71)/71 = 40.8%.
Scenario 2: But what if INFY failed to go above Rs 3800. Then the option would expire
worthless, and you would lose all your money, i.e. your loss would be 100%.
Scenario 3: If INFY closes between 3800 to 3871 at expiry, the price of the CALL at expiry
would be less than Rs 71 (3871-3800) and hence you would still be at a loss between 0 to 100%.
A put option works the exact opposite, where the option price goes up as the stock falls.
A CALL or PUT can be out-of-the-money, at-the-money, in-the-money or deep-in-the-money.
The meaning of these terms is described in the following table.
If Call/Put is Call Put
Out of the Money Stock trading below the strike price Stock trading above the strike price
At the Money Stock trading at the strike price Stock trading at the strike price
In the Money Stock trading above the strike price Stock trading below the strike price
Deep In the
Money
Stock trading way above the strike
price
Stock trading way below the strike
price
In Investar, it is easy to find out any option for any scrip that is either of the above. The figure
below shows a screenshot of the F&O Lookup window that shows all NIFTY options that are out
of the money.

Beginners usually get attracted by the high percentage gains provided by options and feel that
they can get rich quickly by trading options. But, nothing can be farther from the truth! From the
above example itself, it is clear that the risk in trading options is pretty high. As the INFY
example above showed, when you buy a CALL or PUT option, you can lose all your money.
This is important to keep in mind when you actually buy a CALL or PUT. In fact the majority of
option buyers lose money because not only you have to get the timing right, but you are also
betting on the stock to reach your target by a certain expiry date, which makes it all the more
difficult.
Indian stock market does not allow retail investors to short stocks and carry positions for
delivery. This is another reason why options are popular because they allow you to be short on a
stock (e.g., by buying a PUT option). If this is the strategy you want to use, you should use
Deep-in-the-money PUT option as they are much more likely to move in tandem with the stock.
There are many factors to consider (like greeks and volatility) when trading options, but the
important point to remember is that you cannot get option trading right unless you perfect the
timing of your entries and exits. And that is why Technical Analysis is even more important in
option trading. Because if you get your timing wrong, then your capital will erode in no time!
But how does one use Technical Analysis (TA) to trade options? Should you really do TA on an
option chart? You generally analyze the underlying stock technically and then make a decision to
adopt a bullish option strategy if you are bullish (e.g. buying a CALL) and a bearish option
strategy if you are bearish (e.g. buying a PUT).
Although the odds may be against option buyers, there are other less risky ways to trade options
(e.g., option writing), that well probably cover in a future article.
1. Out of the Money This means it is trading is below the strike price.
Using ADX to identify trend
Posted by hpatil on 21/01/2014 0 comments
Average Directional Index or ADX is an oscillator that is used to determine the strength of a
trend. It is a good indicator that gives a confirmation of trend. Since, trend is an important
concept in Technical Analysis, it can be a good indicator in any Technical Analysts arsenal.
The value of ADX fluctuates between 0 and 100. If only ADX is used, then its interpretation is
as follows.
ADX Value Interpretation
Below 20 A weak trend or non-trending
Crosses above 20 Trend may be emerging
Between 20 and 40 Increasing ADX is a confirmation of trend
Above 40 Very strong trend in place
Crosses below 40 Signals end of trend
As you can see in the table above, ADX by itself does not give any indication of the direction of
the trend. In order to get an idea about the direction of the trend, we need to use two sister
indicators along with ADX, +DI and -DI.
When +DI is above -DI, an uptrend is said to be in place, provided the ADX is above 20 and
rising.
When -DI is above +DI, a downtrend is said to be in place, provided the ADX is above 20 and
rising.
Based on the above, there are generally two ways to use ADX, +DI and -DI (each of them have a
corresponding scan in Investar).
Strategy 1:
When +DI crosses above -DI, it indicates a start of an uptrend (in other words, generates a Buy
signal). When -DI crosses above +DI, it indicates a start of a downtrend (in other words, it
generates a Sell signal). To reduce the possibility of false signals in this case, it is a good idea to
ensure that ADX is above 20 and rising when or after the crossover takes place. The scans in
Investar corresponding to this strategy are New Uptrend (+DI/-DI Crossovers) and New
Downtrend (+DI/-DI Crossovers). This is the more popular strategy and also the default way
the Buy/Sell signals are generated in Investar using ADX and an example is shown in the Figure
below. As the figure below shows, however, sometimes the when the +DI/-DI Crossovers
happen, the ADX can be below 20, its a good practice to ensure that the ADX is rising
afterwards to ensure that you dont get trapped in a false signal.

Use of ADX with +DI/-DI crossovers
Strategy 2:
In this strategy, a Buy signal is generated when ADX crosses above 20 and +DI is above -DI. A
Sell signal is generated when ADX crosses above 20 and -DI is above +DI. The scans in Investar
corresponding to this strategy are New Uptrend (ADX) and New Downtrend (ADX).
There are many other scans in Investar that give you stocks in various stages of their trend and
they are shown in the figure below.

Strategy 1 is the more common way to use ADX for entry and exits. Using only DI+/DI-
crossovers generates many false signals and ensuring that ADX is above 20 can reduce the false
signals, but as the example chart of JUBLFOOD above showed, it can sometimes also eliminate
the correct signals. If you want to use +DI/-DI crossover even when the ADX is below 20, a
good practice would be to ensure that the trend is rising afterwards.
However, ADX along with +DI/-DI crossovers is not a perfect indicator and does give false
signals. Hence it is important to remember that there is no substitute for using proper trendlines
to draw trend and use ADX (with +DI and -DI) for confirmation purposes only.
Identifying Growth Stocks
Posted by hpatil on 15/01/2014 0 comments
Indian markets have witnessed a sideways long-term trend for a long time now. No one knows
when a long-term bull market will start; but one thing is certain, its going to happen sometime or
the other. In the current scenario, the market will signal the start of a long term bull market
when it emphatically makes a new high and surges ahead (hopefully after the a decisive 2014
elections). Start of Bull Markets are a good time to hunt for long-term winners. But, when a new
bull market starts, how do you ensure that you have a list of stocks that can be multi-baggers?
One way to do it is to build a list of stocks that have sound fundamentals with a lot of growth
potential. The fundamental parameters that are important to identify growth potential are:
1. PEG - This ratio indicates if the stock is growing at a rate much faster than its PE. You
can find more details about it in this post.
2. P/S This ratio indicates the ratio of Price to Sales for a company. The lower it is the
better it is. It needs to be used in conjuction with Sales Growth%. You can find more
details about it in this post.
3. EPS Growth % This ratio is an indication on how fast the companys earnings are
growing. It is calculated on a month-over-prior year month basis or TTM (trailing twelve
months) basis.
4. Sales Growth % Sometimes a company may not have any earnings to show but has a
very impressive Sales Growth %. A classic example of this was Amazon.com that went
IPO on NASDAQ in the late 90s. It was not profitable for a long time but grew sales at a
phenomenal rate. It is calculated on a month-over-prior year month basis or TTM
(trailing twelve months) basis.
A growth stock can exhibit several characteristics and one needs to use different criteria
depending on whether or not it is profitable. Here are examples of criteria to use under different
conditions:
If a stock is profitable:
1. A low PEG ratio of < 1
2. EPS Growth (TTM)% > 30
3. [optional] Sales Growth (TTM)% > 40
If a stock is not profitable:
1. Sales Growth (TTM)% > 40 - This number can be even > 100 ( e.g. US Internet stocks
of late 90s like Amazon.com fall into this criteria). The nearest example in Indian market
would be a company like Flipkart if it were to go public now. It is also not profitable yet,
but growing sales at an exponential rate.
2. P/S A relatively low P/S is a bonus as this means that the stock is selling relatively
cheap compared to its Sales. However, just because the P/S ratio is high, it does not mean
you should ignore it. Stocks that are growing their sales very fast tend to have high P/S
ratios. In such cases, it helps to compare the P/S ratios with others in the industry and
then decide.
In Investar, there are several fundamental scans to help you identify growth stocks, and they are
shown in the picture below (Hint: Click on the Manage Scans toolbar button to get to this
window).

Fundamental