⚡How Technical Analysis (Factors) Can Help You⚡

Technical analysis is based solely on price. It is the collective actions, not opinions, of every market participant. 

Technical analysis can help you (i) Initiate positions at levels that have produced strong price action in the past. (ii) Give you a place to get out (risk mgmt.), and (iii) a place to take profits.

Important: Investing operates in a probabilistic domain. These factors will have their share of stinkers just like other factors and methods of analysis.

What's important for us is to develop a process (system) around executing these factors and not judge its validity by any one investment. And over time, learn what works and what doesn't; in order to improve our system for executing. 

Breakout Factor

Our first factor is the Breakout factor. This factor is triggered when a stock breaks out above a previous area of supply (resistance) after trading sideways for an extended period of time.

There are two types of breakouts we will track.

Example 1... The breakout to all-time highs | Breakout type 1 (BT1)

Disney ($DIS) had been trading in a $90-120 range since 2015.

The breakout to the upside occurred in April 2019, when buyers took control above $120.

For the upside to maintain momentum, we should see demand around the $120 level.

Lululemon ($LULU) had been trading in a $40-80 range since 2012 (6 years).

The breakout to the upside occurred in February 2018, when buyers took control above $80.

In a little over a year, the stock has risen ~143%.

Example 2... Getting to even | Breakout type 2 (BT2)

Twilio ($TWLO) had been trading in a $24-35 range since 2016.

The breakout to the upside occurred in February 2018, when buyers took control above $35.

These breakouts are common with software companies. Initially, investors bid up prices post-IPO, only to have the stock crash when expectations are not met.

Eventually, some of them right the right ship and go on to be exceptional businesses; like Twilio.

Retest Factor

Our second factor is the Retest factor. This factor is triggered when a stock retests a previous breakout level (see below) or a level where buyers purchased the stock aggressively.

For example...

After breaking out to the upside in August 2017 (blue arrow), Caterpillar ($CAT) re-tested the $116 breakout level on October 2018 (red arrow).

So far, the $116 level has held. And it should if upside momentum is to be maintained.