Understanding Base Breakouts in Continuation Patterns
The strategy behind a base breakout in the form of a continuation pattern is to identify a stock that has been trading in a range and is showing signs of breaking out. The key here is to look for a stock that has established a pattern of higher lows and higher highs, which signals that the stock is in a bullish trend and is likely to continue moving higher.
The Retest of a Breakout
Now, when it comes to the retest of a breakout, this is a critical moment for traders. After a stock breaks out from a base, it’s not uncommon for the stock to pull back and retest the breakout level before the trend resumes. This retest serves as a confirmation that the breakout was genuine and not just a false move.
The Importance of Volume in a Retest
The importance of volume cannot be overstated in this scenario. A strong breakout with high volume is a clear sign of institutional buying and reinforces the validity of the breakout. On the other hand, a weak breakout with low volume can indicate a lack of buying interest, and traders should be cautious of this.
Trading the Retest of a Breakout
To trade the retest of a breakout, you should wait for the stock to retrace to the breakout level and then look for a confirmation of buying pressure, such as an increase in volume. If the stock holds the breakout level and shows signs of buying interest, you can consider entering a long position. However, if the stock breaks down below the breakout level, it could be a sign of a false move, and traders should exit the trade or consider shorting the stock.
Athabasca Oil Sands Corp. (TSX:ATH)
Athabasca Oil Sands is currently retesting a previous breakout in the form of a bull flag continuation pattern. The breakout was marked by an increase in volume, followed by a controlled pullback with minimal selling, indicated by low volume. As the stock moves higher from the bull flag, volume is increasing again, which is a textbook indication of a successful retest. Keep an eye on this stock, as this technical action suggests signs of further upward price momentum.
MEG Energy Corp. (TSX:MEG)
MEG Energy has recently undergone a successful retest of its breakout in the form of a bull flag continuation pattern. This bullish price action suggests further upward momentum and the potential for continued price gains. It’s important to pay attention to the volume dynamics during the formation of this pattern. Specifically, note the increase in volume upon the initial breakout, followed by a decrease in volume during the consolidation phase, and now a pickup in volume upon the successful retest. This increase in volume, in combination with the bullish price action, can provide confirmation of the continuation of the uptrend.
H2O Innovation Inc. (TSX:HEO)
H2O Innovation is currently located on the right side of a large consolidation/continuation pattern. Traders should keep an eye out for a potential breakout, which would indicate a continuation of the uptrend. It’s important to pay attention to the bullish volume profile, which is a textbook example during the consolidation phase of a continuation pattern. A key indicator to look for is high volume during the initial advance of the pattern, as it suggests strong buying pressure, as seen in early 2021. As the pattern begins to form, volume may decrease as the stock consolidates within the pattern, like it did here. However, as the stock approaches the resistance level of the triangle, traders should look for an increase in volume, as we are currently observing. This increase in volume, along with the stock’s proximity to the resistance level, can indicate a potential upside breakout.
Conclusion
In conclusion, a base breakout in the form of a continuation pattern can be a valuable strategy for traders, and the retest of the breakout can provide a high-probability entry point. Volume is a crucial factor in confirming the validity of the breakout, and traders should be aware of this when evaluating a trade.
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