TECHNICAL analysis is all about giving yourself an edge by using charting tools to determine what other investors are doing and feeling, which can arm you to make a profit through timely action.
This week Robert Brain, a director of the Australian Technical Analysts Association, gives us some insight into breakouts the moment when sentiment changes and stocks move quickly. For this exercise we are using a weekly candlestick chart of Breville Group, a well-known developer and distributor of consumer electrical goods.
Candlestick charts are used because they paint a detailed picture of market movements. The broad "candle bodies" in this chart represent the weekly opening and closing prices of the stock. Where the candle is white the stock rose that week while a black candle indicates a price fall.
The "wicks", or thin lines, show how much the stock overshot or undershot the opening and closing prices during intra-week trading. The chart tells us that from April to July Breville traded within a range indicated by the green lines on the chart, with that range tightening towards the end as the lower line rose towards the upper-range line.
Market action slowed in June, with the blue vertical volume lines indicating less Breville stock was traded than in May. But then in late July sentiment changed, volumes rose dramatically and Breville experienced a breakout.
Viewing daily candlestick charts would give investors even quicker early warnings that sentiment has changed but we could not provide that detail here due to space constraints. However, Brain says the price moved dramatically on July 30, with volume jumping the next day as the market caught up.
The question investors will be asking is, can the breakout hold? This is impossible to say, of course, but Brain reminds us that breakouts have often led to rises of up to 300 per cent in following months.
Similar breakouts have been experienced lately by Challenger Infrastructure, Consolidated Media, Kibaran Resources and Sun Resources. Positions taken in stocks like these can be protected by putting in place stop losses, sell orders triggered if the stock moves dramatically the other way.
Breville outsources its manufacturing and takes an active role in developing new products. The formula has worked well, with the stock returning 69.8 per cent to investors in the past year, 62.9 per cent in three years and 22.7 per cent over five years. It's now trading on a price-earnings ratio of 15.14 times, well above the general market's 12.55 per cent.
This column is not financial advice. The writer has Consolidated Media shares.