If you’re a range trader, you might have sometimes found it hard to figure out the direction of the breakout. You can’t be successful in range-trading without being good at reading the direction, and range-bound stocks do eventually break, giving you spots to potentially get long or short in a stock.
Generally speaking, it takes some sort of catalyst to break a stock out of its trading range.
Consider this example, in the chart of Puma Biotechnology Inc. (PBYI).
In the chart above, PBYi was trading in a range, and it was hard to identify a clear direction in the stock; notice that the moving averages don’t show a clear trend, and PBYI is just in between the range.
However, in May 2017, Puma had a positive catalyst, a reason potentially to break out of its trading range. The U.S. Food and Drug Administration Oncologic Drugs Advisory Committee voted 12 to 4 and recommended the approval of PB272, or neratinib, for the treatment of certain forms of early-stage breast cancer. This vote was based on the review of the company’s clinical development program, which included 11 trials in breast cancer. Phase III results were promising, and the results and the studies were statistically significant.
If you got long the stock off of this catalyst on the range breakout, you would have profited significantly. Here’s how the trade would have turned out.
It’s hard to identify the direction of a breakout, in the absence of a catalyst. Focus on range breakouts that had some company news, earnings or corporate actions — or look for upcoming announcements/potential catalysts when you see a range-bound stock — and you may come away with a better idea of what’s next for a stock.
Jason Bond runs JasonBondTraining.com and is a swing trader of small-cap stocks.