Candlestick charts help in lighting the way

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.

By InvestSMART · 7 Aug 2012

By InvestSMART ·
7 Aug 2012

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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.

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Frequently Asked Questions about this Article…

What are candlestick charts and why do investors use candlestick charts for technical analysis?

Candlestick charts are a visual charting tool that show opening and closing prices as broad "candle bodies" and intraday or intra-week extremes as thin "wicks." Everyday investors use candlestick charts because they paint a detailed picture of market movements and investor sentiment, helping spot trends, ranges and potential turning points more clearly than simple line charts.

How do candlestick bodies and wicks reveal price action on a weekly chart?

On a weekly candlestick chart the broad candle body shows the stock's weekly open and close (white/filled for a rise, black/filled for a fall) while the thin wicks indicate how far price overshot or undershot those levels during intra-week trading. Together they help investors see both the direction and volatility of price moves within each week.

What is a breakout and how was a breakout identified in Breville Group stock?

A breakout is the moment when price moves decisively out of a trading range and sentiment shifts. In Breville's weekly chart, the stock traded in a tightening range from April to July and then experienced a sharp price move in late July with a dramatic rise in trading volume—classic technical signs that a breakout had occurred.

Why is trading volume important when spotting breakouts?

Trading volume confirms whether a breakout is supported by market participation. The article notes market action slowed in June, then volumes rose dramatically in late July when Breville broke out. Higher volume the day after the price move showed the market was "catching up," which strengthens the signal that the breakout is genuine.

Can breakouts lead to big gains for investors?

Breakouts can lead to substantial gains—Robert Brain notes that breakouts have often led to rises of up to 300% in the following months. However, the article also cautions that it's impossible to say in advance whether any particular breakout will hold, so outcomes vary.

Which other companies have recently experienced similar breakouts?

The article cites recent similar breakouts at Challenger Infrastructure, Consolidated Media, Kibaran Resources and Sun Resources. These examples show that breakout patterns can appear across different sectors.

How can everyday investors protect positions after a breakout?

Investors can use stop-loss orders to protect positions—these are sell orders triggered if the stock moves sharply the other way. The article recommends stop losses as a way to limit downside if sentiment reverses after a breakout.

What should I know about Breville Group's recent performance, valuation and any author disclosures?

According to the article, Breville outsources manufacturing while actively developing new products. Its stock returned 69.8% over the past year, 62.9% over three years and 22.7% over five years, and was trading on a price-earnings (P/E) ratio of 15.14 compared with the general market's 12.55. The column is not financial advice, and the writer discloses owning Consolidated Media shares.