Pristine.com Presents
Mastering Breakouts and Breakdowns Dan Gibby Lead Moderator, Pristine.com Advanced Stocks and Derivatives Trading Room, and Senior Pristine Certified Trainer Copyright 2006, Pristine Capital Holdings, Inc.
Disclaimer It should not be assumed that the methods, techniques, or indicators presented in this book and seminar will be profitable or that they will not result in losses. Past results are not necessarily indicative of future results. Examples in this book and seminar are for educational purposes only. This is not a solicitation of any order to buy or sell. “HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN INHERENT LIMITATIONS. UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO NOT REPRESENT ACTUAL TRADING. ALSO, SINCE THE TRADES IN THIS BOOK and SEMINAR HAVE NOT ACTUALLY BEEN EXECUTED, THE RESULTS WE STATE MAY HAVE UNDER OR OVER COMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN.” The authors and publisher assume no responsibilities for actions taken by readers. The authors and publisher are not providing investment advice. The authors and publisher do not make any claims, promises, or guarantees that any suggestions, systems, trading strategies, or information will result in a profit, loss, or any other desired result. All readers and seminar attendees assume all risk, including but not limited to the risk of trading losses. Day Trading can result in large losses and may not be an activity suitable for everyone. Copyright © 1994-2006 by Pristine Capital Holdings, Inc. All rights reserved. Printed in the United States of America. Except as permitted under the United States Copyright Act of 1976, no part of this publication may be reproduced or distributed in any form or by any means, or stored in a database or retrieval system, without prior written permission of the publisher. 2
Table of Contents Introduction The Pristine Method® Trading Style and Time Frames Trading Plan
Breakout/down Strategies Initial Pristine Breakout/Down PBO/PBD from Wide Range Bars PBO/PBD from Gaps
Basics and Foundation
Retracement After Breakout/Down
Fluid moves vs. Congestion
Secondary Breakout/Down
Wide Range Bars (WRB)
Late Day Breakout/Down
Volume
Gaps Negated in Morning
Quality Consolidation
Concluding Thoughts
Pristine ESP™ 3
What This Seminar is Not About The intricacies of The Pristine Method® (TPM) Tools, tactics, or setups taught in TPM Parts 1-2 Trading Plan and Managing Your Trading Business Risk management, proper share size, psychological aspects Futures, options, commodities, and derivatives Classical, technical, macro, or fundamental analysis Level II analysis or direct access trading Other topics included at Pristine Trading University 4
Introduction to The Pristine Method ®
5
Who is Pristine?
Established in 1994 by Oliver Velez and Greg Capra, Pristine provides insight, intelligence and education for the self-directed trader Much more than stock tips and buy-sell-hold advice, The Pristine Method® guides both new and experienced traders to a more intuitive understanding of the markets The Pristine educational system helps you understand the markets and prepare you to trade objectively Offer worldwide educational seminars, DVDs, trading software, real-time trading rooms, and trading newsletters
6
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ONSITE SEMINARS DVD
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Eliminating The Barriers To Entry! NEWSLETTERS 7
Pristine Public Recognition RANKED # 1 in Trading Education by:
FEATURED by:
8
Traits of a Successful Trader Trading is a Business – treat it like one! Choose a defined Method Choose a time frame in which to trade from Choose which stocks and/or Futures you will trade Money Management Discipline and Patience to follow your Method
9
Pristine Successful Trader Matrix TRADING PLAN
COMPELLING TECHNICAL PATTERN
Wealth/Income Hardware/Software NO SETUP, Setups NO TRADE!! Instruments Listed/OTC Reward-Risk Share Size and # ENTER AND SET PROTECTIVE STOP Market Internals Management Rules Pivots For Exits Winning/losing Trade Review MANAGE IN BETWEEN Continuing Education Demon elimination Target Stop Discipline/Patience
TPM 1-2
10
Trade Types The Pristine Method® teaches specific Compelling Patterns These should be clearly highlighted in your Trading Plan PBS/PSS CBS/CSS
CBS
PBS
Guerrilla Trades
Breakouts and Breakdowns W and M Formations Pinch Play
+COG
Failed Patterns Bearish Gap that Bullies
11
Breakout and Breakdown Foundation
Introductory Concepts Concept Review Bases and consolidations
Fluid move leaves little congestion
Types of breakouts and breakdowns Quality of setups Fluid versus choppy moves When to trade with or against the intended move Congestion areas
Using Pristine ESP™ 13
Price Congestion Prices move between areas of support and resistance
Fluid move leaves little congestion
Congestion areas have overlapping bars, tails, and gaps Fluid moves have consecutive bar moves with relatively equal openings and closings Congestion areas
Prices retrace easier without congestion to the left 14
Intra-Day Pattern Into Close 15-Min.
Opening price here has higher odds of retracement
15-Min.
Opening Gap above Base has high odds of moving up
Hourly – EOD Base 1515
Volume Analysis Volume = Money and represents commitment or lack thereof Price tells us what a stock is doing; Volume tells us how > 500,000 average 30-day volume Volume increases should occur in the direction of the PBO/PBD; reduced Volume on Retracement Volume increase without price moving is a warning Volume is secondary to price …. Price is King! 16
Proper Base or Consolidation Consolidation is a resting period in an existing trend Want controlled, tight consolidation, with few to no overlapping bars or significant gaps and tails Base of at least 8 - 10 bars Provides the base of support for breakout, or base of resistance if break down Low risk, high-odds strategy using The Pristine Method® 17
Quality Consolidation 20MA
20MA
20MA
Tight arrangement of bars with few tails, overlapping bars, and gaps
18
Improper Basing/Consolidation
20MA
20MA
Poor consolidation: tails, overlapping bars, and gaps
19
Pristine ESP™
Pristine ESP™ will search PBO/PBD in many time frames
20
Breakouts and Breakdowns General Comments Can be traded on any time frame and in any trend Every trade needs a compelling pattern and little congestion above (for longs) or below (for shorts) Increased Volume a plus Not all New High/Lows are Buyable/Shortable Apply other concepts from The Pristine Method® Pristine ESP™ scans to find tradable candidates 21
Determining Targets and Stops Need generous Reward (price target) to Risk (stop loss) Generally, targets will be: Resistance/Support for PBO/PBD Take ½ after a multi-bar move At major moving average, if corresponds with congestion Stops are always placed slightly below the support area for longs, or slightly over the resistance area for shorts
22
Initial and Secondary Breakout
PBO to New Uptrend The Pristine Method® teaches various ways to trade PBO/PBD from a sideways trend to new trend. We will cover: Initial PBO First Retracement Secondary Breakout Wide Range Bar (WRB) out of a base Other bullish/bearish Retests 24
Breakout Types 1. Initial Breakout: The stock breaks above resistance after a Quality Consolidation.
2. First Retracement: The stock retraces towards the Initial Breakout point, and reverses on support. This is the safest entry point, provided it retraces in a compelling manner.
3. Secondary Breakout: The stock moves above the Initial Breakout (prior high), after consolidating at the prior high. 33 11
22 25
Proper Initial Pristine Breakout
Stop Loss
Stop 20MA
Initial bullish move, bullish consolidation in upper 1/3 Buy PBO (Vol. a plus)
26
Improper Pristine Breakout Play Incorrect PBO: Extended 0
Retracement analysis is used to objectively measure the Strength or Weakness of a move counter to the prevailing trend
40 50 60
100
Some suggest buying over a prior high, irrespective of the Retracement level
We sell into extended rallies over prior highs 27
Secondary PBO/PBD Correct PBO: Consolidated at prior high 0
We sell into that band wagon mentality of buying new highs if the stock is extended
40 50 60
100
Secondary PBO/PBD are tradable if they have consolidated over time at the prior high 28
Buyable Secondary PBO 3 PBO 1
2
Is this Secondary PBO buyable? Why?
+WRBThese afterwere both as breakout failedrecommended PBD longs one day in a competitor’s newsletter
1. PBO Initial Not a Pristine sinceBreakout very extended to make new 2. MA First highs (also 5-day of Retracement TRIN a CBS 3. under prior low) Breakout Secondary
29
Breakout Types 1. Initial Breakout 2. First Retracement 3. Secondary Breakout
3
2 20MA
3
1 3
2
2
30
Stops on Breakouts
Trail stop after two bars
20MA
Buy pull back
Trail stop after two bars
Buy First Retracement on support This is low risk entry
31
Poor Pristine Breakouts Would you be a buyer or seller into strength here?
Buy PBO?
Some traders would buy these as “breakouts” What has to happen to make them buyable?
32
PBO From Base The stock builds support over time +WRB to the top of the base
Could you add on this PBO?
Buy PBO over +WRB out of base Buy over +WRB through resistance
Manage in between
Stop Loss
What does the consolidation after the PBO imply? 33
PBO on Pre-Market Economic Number S&P Futures 5-Min.
Nasdaq Futures 5-Min.
QUIZ: Was the Initial PBO buyable? First Retracement? Second PBO?
Futures had bullish PBO at 8:30 Economic Number
34
Pristine Breakout Analysis Incorrect: Extended
Factors Extended before PBO?
Correct: Gap from consolidation
Consolidate in a tight range before PBO?
Incorrect: Extended
Incorrect: Deep retracement Correct: Pull back into +WRB
Congestion to the left? Tails, overlapping bars, and gaps? 35
PBO and Retracement Quiz QUIZ: Name the type of Setup at each letter and discuss whether or not buyable.
G F
H
C 20MA
B
D
E
A 36
PBO to New Uptrend
Buy retracement since extended Pull back to gap fill from 2x bottom; buy over prior bar’s high PBO after 2x bottom
buy Aggressive Pristine entry, stop under base
Stop 37
Patterns on Multiple Time Frames Daily
PBO
Monthly Monthly
GOOG - Daily
PBO
Failed breakdown PBO
S
S Reverse H&S
H
Weekly 3838
PBO/PBD Stock Scanning Pristine ESP™ Scans Swing Trading Module Narrow Range 7 Setup; Daily Basing; Daily Above Average Up/Down Volume Guerrilla Trading Module 10/10 Buy/Sell Setup; Wide Range Up/Down Bars; Bullish/Bearish Engulfing Bars Micro Trading Module 15-Min. Basing; Basing in Top 2% of Day’s Range; Gap Up and Strong; Gap Down and Strong; 30-Min. Gap Buy/Sell Basic Trading Module Above Average Up/Down Volume; 52-Week High/Lows; Top 20% Gainers/Losers; One Month High 39
Pristine ESP™ 30-Min. Gap Buy 15-Min.
Pro Gap and +WRB, consolidation at high
Triggered
Stocks that gap up/down and then make new highs/lows after the first 30-Min. session often ignite new moves
40
Initial & Secondary Breakdown 41
Breakdown Types 1. Initial Breakdown: The stock breaks below support after a Quality Consolidation.
2. First Retracement: The stock retraces towards the Initial Breakdown point. This is the “safest” entry point, provided it retraces in a compelling manner.
3. Secondary Breakdown: The stock moves below its Initial Breakdown point, after consolidating at the prior low. MR
22
MS
11 33 42
Breakdown Types Initial PBD 2
1. 2.
Initial Breakdown First Retracement
3.
Secondary Breakdown
QUIZ: Which Secondary Breakdowns are quality?
1
2
1&3
3
4343
Gap Below Prior Low ISRG – 5-Min.
Gap under support Short first retracement
Short 5Min. low Add Secondary PBD. Why?
Daily
stop
Gap under +WRB 4444
30-Min. Low on Upgrade and Bear Gap Daily
Morgan Stanley: Punk Ziegal analyst on CNBC says stock should be bought aggressively here; those selling making mistake 15-Min.
Gaps under much support Stop loss
Bear Gap, deep into Support
Short First Retracement or 30-Min. low
5-Min. 4545
Initial and Secondary PBD Short Initial PBD at d20ma 20MA
Relentless selling with weak bounces; short PBD and Retracements
Buy First Retracement
Short Retracement
Gap and +WRB 46
Bear Flag Breakdown Monthly
Price bounded by two parallel trend lines, against the prevailing trend Volume typically lighter in flag
Implied Measurement Met Near Measurement met atSupport prior monthly major support
Short below trend line Stop over prior high Implied measurement 47
Head and Shoulders H Stop Loss
S
S
Short PBD
Target Area
The left and right shoulders are opposite the higher head in both distance and time
Short PPD of the neckline on expanding volume
Implied measurement
48
Pristine Breakdown Quiz B
D
I
F
K A
C E
G H J L
QUIZ: Identify the type and quality of each marked trade.
M 49
PBO/PBD From Wide Range Bars
WRB After Low Volatility PBO
Many PBO/PBD fail
If sloppy consolidation, wait for WRB that closes outside the consolidation Stop Loss
PBD
The WRB shows commitment and has high odds of follow through if no congestion to left 51
Bullish +WRB Out of Base Daily
15-Min.
+WRB PBO with r20/40ma Hourly
Add pull back in +WRB
+WRB PBO
52
PBD From –WRB Bearish, tight consolidation at bottom of –WRB Short Initial PBD; leaves overhead congestion Add retracement
–WRB/Engulfing after weak bounce
Short -WRB PBD, stop over consolidation 53
-WRB PBD What do these tails tell us, particularly after the prior +WRB from base? Short PBD Bearish action after failed buy setup
What does this consolidation imply?
54
Risk of Buying Before +WRB Completed At A, the bulls were confident while the bar was being formed
Unhappy bulls
How would the bulls feel if the bar closed like B? A
B +WRB becomes bearish TT at bar’s close Short under – WRB/engulfing 55
PBO/PBD From Base Against Trend Stop Loss
Wait for +WRB to close above base
Wait for -WRB to close below base
Stop Loss 56
Bullish +WRB Out of Base Sell on Novice Gap
Buy Initial PBO; add over +WRB from base
+WRB closed outside the base
20MA
No congestion above, so odds of continuation high
Trail stop under a prior bar’s low or when far from 20ma 57
Breakout From Sloppy Consolidation Daily
5-Min.
20MA
Target = Resistance
Intra-day chart of the bar following daily +WRB
Indecision settled. Why? 20MA
Stop under +WRB
QUIZ: Could you buy the afternoon PBO? 58
PBO After +WRB Through Resistance +WRB through 3 prior highs and trend line
Bullish gap after -Trap
Stop loss
59
PBD From Bearish Consolidation
20MA
-WRB under support; short PBD QUIZ: Where is stop and target?
60
Breakdown After -WRB Daily Daily Daily Daily
Daily
15-Min.
60-Min.
20MA
Stop Loss (inside bar’s high made 2x top) 60-Min. 20MA
60-Min.
Short under Support/-WRB
Short under support; no support below! 61
Breakdowns and Management Buy setup failure First Retracement shortable
-WRB shows bears in control
Short under –WRB after close under support
6262
+WRB PBO 15-Min.
Daily 20MA
+123
+WRB from PBS on MS 20MA
6363
Breakout and Breakdown From Gaps
Initial PBO From Pro Gap Pro Gap - one that ignites a new move up or down
Novice Gap – one in the same direction of an already extended move, and typically ends the move
Continuation Gap – one that continues a move, typically at half-way points
Conflict resolved
Stop Loss
Initial bullish move, bullish consolidation in upper 1/3, then Pro Gap, has high odds
65
Gap Questions Before Trade Does the Gap create a compelling pattern? Where is the next area of Support or Resistance? Did it Gap from a consolidation or from an already extended move? Is the Gap too excessive to invalidate a favorable Reward-Risk? Does it set up a compelling pattern intra-day after the Gap? Is the Reward-Risk at least 3:1? If so, enter and manage in between per your Trading Plan 66
Gap Under Bearish Consolidation Daily EXAMPLES MORE
Stop over bearish consolidation
Pro Gap, no bounce, short 5-Min. low
6767
Gap Over -WRB Daily
Bullish pattern? First target is prior high
Distance to next Resistance?
20MA
Gap over bearish bar
Gap from consolidation? Gap too excessive? Bullish intra-day pattern? 68
Gap Over Resistance, No Congestion 5-Min. 5-Min. Add 5-Min.
Daily KLIC - Daily - Daily over CNTF -TARO DailyGap
resistance Gap over resistance
PBO
5-Min.
G A P
Bear Pro Gap, shallow bounce
Are Gap Questions satisfied?
Shorted bounce, stop high Buy 5Min. high Buy 5-Min. PBS Stop Buy 5-Min. PBS
PBO from Pro Gap Daily Daily 5-Min.
Pro Gap over – WRBDaily and resistance Buy bullish intraday pull back
Daily
Daily
Pro Gap Buy 5-Min. high
Weekly
70
PBO Multiple Time Frame Pro Gap over resistance
Daily 5-Min. Daily
Monthly
Daily
Weekly
Weekly
Weekly
PBO after +WRB from base 71
Pro Gap Examples Daily Gap over bullish consolidation
Daily
Gaps out of multiweek consolidation
Bullish gap after -Trap
7272
Pro Gap PBO to New Uptrend Daily
5-Min.
Add PBO
Pro Gap from base Buy pull back 73
Pro Gap Over Prior High Daily
5-Min.
Gap over consolidation
Tight bullish consolidation; buy high, stop low
Bullish gap after -Trap
7474
PBD and PBO Daily
Target Area Buy First Retracement
Gap over resistance
Short PBD
+WRB
+WRB 75
Bearish Gap PBD Weekly
Daily
20MA
20MA
Failed CBS/BT/+COG on MS
TIP: A gap just under a +WRB with no support is powerful!
Failed buy setup at prior low, no support
76
Gap Under Support Daily Daily Daily Daily
60-Min.
LH-1 LH-2
If you bought 15-Min. this PBO, you 15-Min. are aShorted _______? low or 2/5-Min. PSS, stop high.
L
20MA
Are these playable?
Buy Setup with +COG
Covered 1/3 lot
Covered 1/3 lot 5-Min.
Stop Loss
B
Target Area Covered 1/3 lot, with trail stopAremaining
WRB
Bearish Gap under support; short 5-Min. low; Vol. confirms bearishness
Target from –BM is Major Support 77
Late Day Breakouts and Breakdowns 78
Late Day Breakout (LDBO) Setup, Entry and Exit Guidelines 8 - 10 bar base or consolidation in a tight range In the upper 1/3 of the preceding bullish move Above the 20MA on intra-day charts No significant resistance/congestion to the left Up on the day, and over the prior bar’s close Breakout over resistance, on Vol., after 2:15 ET Buy over resistance, with stop under base Sell ½ under reversal bar; other ½ far from 20MA, or congestion
79
Late Day Breakdown (LDBD) Setup, Entry and Exit Guidelines 8 - 10 bar base or consolidation in a tight range At the lower 1/3 of the preceding bearish move Below the 20MA on the intra-day charts No significant support/congestion to the left Down on the day, and under yesterday’s close Breakdown under support, on Vol., after 2:15 ET Short under support, with stop over base Cover ½ over reversal bar; other ½ far from 20MA, or congestion
80
Late Day Breakout Daily Daily Daily 20MA
Up on day and over prior close Tight bullish base near high, during doldrums, and into r20ma 60-Min.
15-Min.
15-Min.
20MA
Buy LDBO
30-Min.
Bullish hourly consolidation 15-Min.
20MA
81
Late Day Breakout Daily
NIHD 15-Min.
Buy PBO, add over +WRB
15-Min.
Significance? 20MA
Are LDBO Questions satisfied? 15-Min.
Bullish Volume 82
LDBO After Gap Into -WRB Daily
15-Min.
20MA
Buy LDBO, stop under base
20MA
Gap into –WRB after five red bars
Late Day Breakouts PBO
Daily
Daily
Bullish +WRB PBO 20MA
20MA
Buy LDBO 15-Min. Stop
Buy LDBO, stop under base
20MA
20MA
20MA
15-Min.
15-Min.
84
Bullish Gap Into -WRB 5-Min.
Daily
Buy 30Min. high
Bullish gap after 15 red bars
Add LDBO
PRX - Hourly
Gap Daily (at close) 15-Min. 8585
Late Day Breakout Examples
20MA
20MA
20MA
20MA 20MA
Late Day Breakout Examples (B)
(A)
20MA
20MA
(C)
(D)
20MA 20MA
87
Above Average Up/Down Volume 15-Min.
+WRB out of base on Vol.
Volume shows the magnitude of interest Unusually high up/down volume in the opening Reversal Period is often associated with Pro up/down moves Keep Pristine ESP™ alert box open and evaluate each issue on multiple time frames 88
LDBO Quiz Daily Daily- ENG
15-Min.
15-Min.
Whether
F
D
D
PBO 15-Min.
Daily - ENG
C
C E
B B AA
D 20MA
QUIZ: IdentifyQUIZ: entry, stop, Rank QUIZ: Rank and target on each LDBO. each PBO each PBO
Late Day Breakdown 60-Min.
LDBD Criteria Down on the day Below prior day’s close
20MA
Basing at low Stop
Target = Demand Increased volume on breakdown
Bearish consolidation at low of –WRB; short PBD
Consolidation near low into d20ma Short breakdown, stop over base 90
Late Day Breakdown Examples (A)
(B) 20MA
20MA
(C)
(D) 20MA
20MA
91
Finding LDBD Using Pristine ESP™ Whether
20MA
Under Micro Trader Scan: 15-Min. Basing Gap Down and Weak Last Trade at Low Stocks Near Lower 2% Daily Range
20MA
92
LDBO/LDBD From Morning Gaps Negated
Bearish Gaps That Bully Resistance Oversold stock with little congestion to the left The stock gaps down significantly and then rallies strong at the open, on Increased Volume (Vol.) Bar closes with a +WRB on the 30-Min. chart, at or through intra-day resistance The +WRB should have a very small, if any, bottoming tail Look for a bullish intra-day entry, and manage in between Reverse applies for bullish gaps negated in morning 94
Bearish Gap That Bullies Resistance Daily
Daily
15-Min.
5-Min.
Bullish basing through doldrums; Add PBO buy LDBO
20MA
Extended daily and Gap
20MA
Bearish Gapafter +WRB close under gap, no Support BT
Hourly
G A P
20MA
Retracement buyable
9595
Bearish Gap That Bullies Resistance Daily
15-Min. 20MA
Buy LDBO Extended daily and Gap 20MA 20MA
+WRB close after gap, no BT
Hourly
96
Bullish Gap That Buries 30-Min.
30-Min.
1
1
2
2 3
20MA
3 1. Bullish Gap 2. 100% Gap Fill in first 30-Min. 3. Short PBD (or other bearish entry) on smaller time frame, if no congestion to left
97
Using Pristine ESP™ to Find Candidates
Go to Scans; Micro Trader; Gap Down and Strong (for longs), and Gap Up and Weak (for shorts)
98
Concluding Thoughts
Pristine Services and Education
Thank You For Joining Us! At this point, you have the information to build on. It’s up to you to work with the material and now make it yours. There are no secrets or proprietary indicators to making money in the markets. Defining an opportunity, where the odds are in your favor, then having the discipline to follow your trading and money management rules is all that you can do. Your job is to objectively monitor, then change as the market suggests you should.
In closing, we at Pristine wish you great success! 101
