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Friday, January 1, 2010

Breakout Principle

New highs and new lows in commodities are significant price junctures watched by both trend traders and contrarians. From a psychological perspective alone, the ability of a market to exceed a previous high or low is a powerful signal that can attract traders and cause chain-reaction buying or selling.

Obviously, for markets to establish long-term bull or bear trends, they must continue to make new highs or new lows. Breakout players and trend followers monitor market behavior at important high or low levels (for example, 20- or 50-day highs or lows) to look for evidence of emerging trends, while floor traders and swing traders also watch these levels and attempt to capitalize on false breakouts.

The theory behind breakouts new is that if a market moves to new highs or new price (or new lows), it is exhibiting the necessary great volume to establish a significant trend. The more significant the volume and more significant the market penetrates (longer terms), the more strength of the market is showing, and the bigger the resulting trend.

For example, a market exceeding the highest high of the past 10 days does not necessarily imply the inception of a major trend. By contrast, if the market exceeds its 40- or 50-day high, it's showing much greater strength and the chances of a major trend forming are more significant. (In a way, penetration of longer-term highs or lows confirms the penetration of shorter-term highs or lows.) In other words, for a bull or bear market to develop, the commodity will have to first pass through these levels first. The other level is the volume, higher the volume, better The trend line!!

"Sharp wire brushes leave your caviar looking clean"