Shark School of Trading: Anatomy of a Breakout

We’re back today with the second iteration of a periodic feature called the “Shark School of Trading.” As we mentioned in Monday’s “tutorial” the focus of these columns will be managing a trade after making a stock selection.

The market has perked up Tuesday morning on slightly lower-than-expected Employment Cost Data and Consumer Sentiment. There are minor fluctuations from the consensus view, but market players are quick to embrace anything that they think may cause a friendly Fed.

There is quite a bit of random action as market players position for Wednesday’s news flow, including the Fed interest-rate decision, but there is a high level of optimism, which many folks think is unwarranted.

With that said, I’m doing some short-term trading and wanted to illustrate a classic-looking chart setup. This is a good example of what I look for when trying to find a situation ripe for a breakout.

Hims & Hers Health, Inc. (HIMS) provides health care and wellness products that are targeted at specific male and female needs. The company nearly doubled its revenues in the third quarter over the previous year. I’m not going to delve into the fundamentals, as this is a pure technical play at the moment.

The stock has been forming a base in the $7.40 to $7.75 area for a couple of weeks now. I’m looking for a move that would constitute a new closing high. That level is $7.80.

HIMS stock is pushing up against that level Tuesday and can potentially attract traders who are always hunting for breakout momentum to chase. The stock could use more volume but is on pace to be above average.

One of the keys here is that the chart (see below) is not extended. There is a very good base, and the pullbacks have been relatively shallow. That suggests that there is very strong underlying support.

I started a HIMS position Tuesday morning and will trade it in a very short time frame. I’ll do some scalping intraday, and if it looks to close well, I’ll likely be a late-day buyer in anticipation that other traders will discover this attractive pattern when they do their research tonight.

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