People sometimes email asking what you look for in a stock or chart or whatnot. No simple answer – there are countless patterns or potential special situations to keep an eye out for. But one simple one is a long base from which a breakout could occur. We had one of these in Las Vegas Sands (LVS) a few months ago and the stock took us on a wild and profitable ride. Below is a chart for Atheros Communications (ATHR) – it is in its 5th week of building a base; generally in the mid $31 to $34.00 area. It teased this morning by breaking $34 but fell back into its range so a false alarm. But this is exactly the type of chart… if it breaks out… you want to try your hand in. For an example we can use ATHR itself – look at the base it build in Aug-Oct 2010. After a fakeout in mid September (aggravating) it finally broke out in late October for real, clearing $28 and it was north of $33 in 2 weeks. That’s nearly 18%. (granted 18% is three day’s work for Netflix, but I’m trying to speak to the 3000 normal stocks in the universe)
Now of course this doesn’t always work but playing technicals is all about putting the odds in your favor and probabilities. If ATHR clears $34 and the market in general is benign at the time, it could have another breakout move ahead.
Disclosure: Long Atheros Communications in fund; no personal position