Trading Zoomers - Bases, Breakouts and Pivots

Slav Fedorov
Slav Fedorov, Yahoo! Contributor Network
Jul 15, 2009 "Share your voice on Yahoo! websites. Start Here."
Stocks do not advance in a straight line. They move in a succession of spurts and consolidations resembling a staircase. The goal of trading is to capture these zoomers at the beginning of the advance and sell when it stalls.

Base

A base is a period of consolidation when a stock's advance stalls and/or reverses. It can last anywhere from several weeks to several years. Sometimes a stock churns while bulls and bears duke it out but neither has the upper hand. Other times a stock sells off and languishes in oblivion, seemingly ignored by the crowd.

Breakout

Sooner or later the base will form a lower and an upper band called support and resistance. Each time a stock sells down to the lower band, it finds support from buyers. Each time it reaches the upper band, it finds resistance from sellers.

A stock can't base forever. Eventually bears or bulls will gain the upper hand and the stock will either break down below the support line (breakdown) or break above the resistance line. The break above the resistance, or out of the previous trading range, is called a breakout. It is usually caused by some unforeseen but significant event like an earnings surprise, a new product introduction, an FDA approval, or a favorable ruling.

The importance of a breakout is that the stock is saying that it is more likely to go up than down, constituting an ideal buy point. But it does not tell you how it is going to go up or how high it will go. It can shoot straight up, stall, or pull back before resuming an advance, or even reverse and fail.

Pivot

A breakout signifies the stock's passing a significant point: pivot.

Webster's defines "pivot" as:

2. Axis consisting of a short shaft that supports something that turns.

A turning point. A point where a stock changes its behavior (and/or direction) due to a confluence of circumstances.

Some traders focus on calculating exact pivots. Not necessary. A pivot can be a specific price lasting for a few trades or a congestion area lasting for several days. Or a pivot can be triggered but fade, creating a new buy point. Generally, if you buy a breakout within 48 hours, your return is going to be more or less the same in the big scheme of things. No need to obsess over pennies.

Published by Slav Fedorov

Full-time stock trader and founder and managing member of TradingZoom, LLC, a provider of timely stock picks to part-time traders. Former banker, stockbroker, financial planner, with over 20 years market ex...  View profile

  • A base is a period of consolidation when a stock's advance stalls and/or reverses.
  • A breakout is a stock breaking out of a trading range on strong volume.
  • A pivot is a critical point where a stock either reverses or continues in the same direction.
The importance of a breakout is that the stock is saying that it is more likely to go up than down, constituting an ideal buy point.

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