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What I see in the chart: The Standard & Poor’s 500 index (SPX) is technically breaking out here. You won’t hear that anyplace else because it’s not at all-time highs – which the mainstream media needs to be convinced — but the chart clearly shows a “coiling pattern.” This happens when resistance and support areas are converging on a crash course.

When that happens, there is an imminent breakdown or a breakout. Wednesday saw a significant breakout, which tells me that buyers are winning over the sellers.

The chart:

What I expect to see next: Wednesday’s close confirmed this breakout. The next significant level is the all-time high on the SPX of around 2,450; if we get there, we’re looking at 2475.

The Relative Strength Index – also in the chart – has been range-bound on the SPX, not close to either extreme; that confirms that there’s room to run to the upside before it becomes short-term overbought and runs out of steam.

What’s the risk: The 50-day moving average is around 2,417 and that is a significant support area, so the risk in this play would be down to that level to hold. The upside, again, is 2,475, so not a really big breakout, but a move nonetheless, and one that everyone else will be excited about once the index hits new highs.

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Keith Kern has been a full-time day-trader for 17 years; he moderates the Lightning Alerts chatroom at BiotechBreakouts.com. He does not trade in indexes or ETFs at all – focusing his day-trades on individual stocks – but analyzes the market from the top down looking for his daily trading ideas. While he sometimes trades stocks that are members of the S&P 500, he did not have any shares, options or open orders in any such stocks at the time this commentary was published.

Author:Keith Kern

Technical traders often look for certain specific price actions as an indication of either bearish or bullish trading. They’re not looking for stocks with choppy trading or stuck in a range, because they are looking for a clear direction; trading stocks with no clear direction is pure gambling and unnecessary risk.

In general, you want to trade stocks that are in motion, because these tend to stay in motion. There’s no need to put on risk in a market that isn’t trading off of some catalyst or is trading sideways.

For example, take a look at the iShares MSCI Brazil Capped ETF (NYSEARCA: EWZ):

Source: TradingView

In the daily chart shown here, the support and resistance lines are drawn in blue. You wouldn’t want to trade this because there is no clear direction; you can’t really see what’s likely to happen with EWZ, as it was just pinballing back and forth between its support and resistance areas. For many trading styles, there’s not a recognizable pattern to trade on here.

Now let’s take a look at a point — a counter-example — where EWZ had the motion you might be looking for.

Source: TradingView

In this chart, EWZ gapped down significantly due to political uncertainties. That in mind, this may have been a better opportunity. For example, the stock is in motion, the news is out and the ETF fell over 15% in one day. Consequently, this could have been considered as a mean-reversion trade.

Final Thoughts

When an ETF or stock is trading sideways, it’s best to avoid that. The better price action to trade is one that is clearly defined, with some news and technical patterns to back it up. Keep in mind markets don’t always have a clear direction, and you should be patient when the markets aren’t in motion and just having choppy trading.

Author:Keith Kern

One factor to consider when trading stocks is the company’s “float,” simply the number of shares outstanding that are available to trade, less restricted shares. Thus, the float represents all shares of a public company available to trade in the open market. (Restricted shares, or treasury stock, is excluded from the float because it can’t be traded in the open market.)

Floating Shares Explained

When the number of floating shares is high, it typically means that the stock is fairly liquid. It’s the opposite when the float is low; the stock could be illiquid and, in the presence of a catalyst, it could tend to have extreme moves quickly. This is basic supply-and-demand stuff; if market participants want to buy or sell shares of a low-float stock, it’ll drive the price higher, or lower, respectively, causing extreme moves.

What Affects Floating Shares

Floating shares can be affected by a number of things, most notably secondary offerings, stock splits and share-buyback programs.

Secondary offerings are corporate actions in which the company looks to sell shares in the open market to raise capital. Consequently, this dilutes the stock, and the float increases.

Stock splits could increase or decrease the number of shares floating. If a company issues a traditional stock split, the number of shares in the float increases. However, in a reverse stock split, the number of floating shares decreases. Share buybacks are corporate actions in which a company purchases some shares available to trade, which decreases the float.

There are several websites that will keep you in the loop with corporate actions that affect the number of shares floating. For secondary public offerings, refer to Nasdaq’s webpage of upcoming secondaries. Additionally, you can find upcoming stock splits on Nasdaq, here.

Final Thoughts

When you’re trading or invested in a stock, it’s important to known when the number of floating shares may change. If the float shares increases, there will need to be increased buying or selling pressure to move the stock. On the other hand, if the number of shares floating declines, the stock may experience more extreme moves when the demand for shares to trade hits the reduced pool of what’s available to trade.

Author:Keith Kern