One of the most recognizable chart patterns is the trading range. When the price of a stock stays within a horizontal price band for some time, it builds energy. Eventually, either the bulls or bears succeed, causing a breakout and a significant move. Ranges provide an advantage in that when the breakout occurs, it allows traders to get in at the start of a potentially big move. That can mean big profits. The main disadvantage is that ranges are notorious for having false breakouts. This can widdle away capital before a big move ensues. The following stocks have been trading in a range recently, and have already broken out or are very close to it. For stocks that haven't broken out yet, wait for the breakout to occur before anticipating when, or in which direction, a breakout will occur.
SEE: The Anatomy Of Trading Breakouts
Viacom (Nasdaq:VIAB) has been in a trading range for all of 2012. During this year, Viacom has had a low of $44.89 on February 2, and a high of $49.85 on May 3. These levels mark the extremes of the range, and also potential breakout points. If the stock breaks to the downside, the target is $40. An upside breakout is less likely at this time, but if it occurs, the target is a $54.75. Volume should increase on a breakout in either direction. If it doesn't, the breakout is more likely to be false.
Dillard's (NYSE:DDS) has been in a short-term range since the middle of May. On May 11 the stock put in a 52-week high at $72.46, and has traded below that level since. As for support, an intra-day low from May 8 at $63.73 has so far held off further declines. These two levels are the ones to watch, because if either is penetrated, it means a potential breakout. Dillard's stock is currently trading near the lower end of the range; if a downside breakout occurs, the target is $55. While it is a ways away at the moment, an upside breakout could also occur. If it does, the target is $81. No matter which direction the breakout occurs, volume should increase when the breakout takes place. This confirms the breakout and makes it more reliable signal.
SEE: Technical Analysis: Support And Resistance
PerkinElmer (NYSE:PKI) has been in a range since the start of February, although, the range has been slightly expanding. The expanding range means multiple false breakouts have occurred for those using horizontal support and resistance levels. On June 26 though, the stock made a thrust lower which is likely a breakout to the downside. The prior low of the range was $25.10, set on June 4. The target for this downside breakout is $22. Ideally the stock should see a continued increase in volume as it declines. If it does not decline and instead moves back into the former range, this would indicate that the recent move lower was a false breakout. The top of the range is at $28.24, and while unlikely, if a move above that level were to occur, the target is $31.25.
SEE: Support & Resistance Basics
As of the June 26 close at $95.60, Roper Industries (NYSE:ROP), is very close to support and a potential breakout to the downside. Range support developed in early April just above $95. On several attempts since then the stock has come very close to $95, but has not been able to break through it. If that level is penetrated, a further drop could materialize quickly, especially if accompanied by increasing volume. The target is $86.50. If support holds, the stock could head back toward the top of the range at $103.50, which is also the 52-week high. If that high is broken, it signals an upside breakout and a target of $112.
The Bottom Line
Trading a range breakout takes patience. Wait for the breakout to occur and don't attempt to anticipate the breakout direction, or when it will occur, in advance. Once the breakout occurs, step in and trade. False breakouts do occur quite often, which means sometimes multiple entries are required before catching a significant move. If a stock breakouts out and then moves back into the range, it is likely a false breakout and the trade can be exited. Wait for another opportunity to get in. The support and resistance levels of the range are key levels and should be watched closely. Stops don't need to be big, but should control risk while still allowing some room for the stock to move.
Charts courtesy of stockcharts.com
At the time of writing, Cory Mitchell did not own shares in any of the companies mentioned in this article.