Blog - Investing Notes
February 15, 2005 - Identifying Market Breakouts
In his February 12 blog entry, market psychologist and trader Brett Steenbarger offers tips on "Identifying Breakout Moves" in stock market indices. He notes that:
- The distribution of stock market price changes has a taller, thinner peak and fatter tails than does a normal (bell) curve. This empirical evidence says that "markets…spend a large percentage of their time in a range bound mode, but then can trend unusually far and persistently in a single direction."
- A breakout moves starts from a prior range extreme, with volume expansion and size of move proportional to the duration of the prior range. Breakouts do not give opportunities to get back in at the penetrated resistance point.
- Breakouts in leading sector indices may provide advance notice of a breakout in a broader index. He provides an example of the semiconductor index leading a breakout in the S&P 500 index by 45 minutes.
In summary, Brett Steenbarger’s experience is: "The key to anticipating market breakouts – rather than getting on board once they’ve begun – is finding the leaders…"
See Blog Synthesis: Some Trading Indicators for analyses of the usefulness of other technical indicators. See also our blog entry of 6/7/06 for research on using certain leading industries to predict overall market performance.
