Range Breakouts: Second Chance Entries

By Cory Mitchell | September 02, 2014 AAA

Lots of traders watch for breakouts, but they can be a tricky trade since multiple false attempts are common before the actual breakout occurs. Another strategy is to let the breakout occur if it is strong and the price stays above the breakout level for a number of days, then wait for the price to pullback to the breakout point before initiating trade. The main problem with this is the pullback to the breakout area doesn't always occur. But if the prior resistance level was well established and there was a strong breakout, if the price does pullback, it is a low-risk-high-probability trade.

Sensata Technologies (NYSE:ST) had a well defined resistance level, as the price reached $41.09 and $41.13 on moves higher in October and February. In March the stock had a false breakout, moving above the prior resistance but quickly falling back below. On March 17 the price surged again, this time causing a significant break of the area. Pullbacks to $41.60 to $41.15 now provide "second chance" entries. Stops can be placed just below $41 (or a bit lower to provide a touch more room). Target is $43.30 to $43.50, or implement a trailing stop.

Sensata Technologies (NYSE:ST) had a well defined resistance level, as the price reached $41.09 and $41.13 on moves higher in October and February.

Carpenter Technology (NYSE:CRS) had well defined resistance just below $63, which was aggressively broken on March 19. Pullbacks between $64 and $63 present second chance buying opportunities. Place a stop below $62.50 with a target above the recent high (currently $66.54). Instead of a target, consider a trailing stop, where the stop is progressively moved up to just below swing lows as the price begins to move higher again.

Carpenter Technology (NYSE:CRS) had well defined resistance just below $63, which was aggressively broken on March 19.

Mine Safety Appliances (NYSE:MSA) has formed well defined resistance between $55 and $54.55. This area was definitively broken on March 19, and the price has continued to move higher. A pullback between $55.50 and $54.50 provides a second chance entry, with a stop below $54. Target is above $57.50, or just above the price high prior to entry. The target based on the range height is between $60 and $61.

Mine Safety Appliances (NYSE:MSA) has formed well defined resistance between $55 and $$54.55.

Valley National Bancorp (NYSE:VLY) is still in indecision mode. Resistance near $10.30 was broken but then the price retreated. On March 21 the price managed to reach $10.50 but still hasn't significantly cleared the resistance area which now extends from $10.30 to $10.50. If the price moves well beyond $10.50--to at least $10.70--then a pullback to the $10.50 to $10.30 provides a second chance breakout opportunity with a target beyond $10.70 and a stop just below $10.20. This is a unique case though. There is additional resistance near $10.70, so a move beyond that could signal a longer-term up move. On the other hand, potential resistance up to $10.73, and lack of definitive upside breaks makes this stock less compelling than the prior three trades (should they materialize).

Valley National Bancorp (NYSE:VLY) is still in indecision mode.

The Bottom Line

Second chance breakouts are missed by many traders. They can be messy, but if a second chance opportunity develops, it is pretty clear cut. The old resistance area should now act as support, so risk is kept small by placing a stop just below the old resistance (new support) level. An upside target can be used, or a trailing stop implemented to capture longer-term gains which may arise following a breakout.

Charts provided by Stockcharts.com

Disclosure - At the time of writing, the author did not own shares of any company mentioned.

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