Investing has its own language. You may have heard the term “breakout” tossed around, but what is it, and how do you look for it? A breakout is a key stock move that presents you with a precise entry point to buy a stock for maximum gains.
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A stock may be stuck trading sideways for weeks or months if there is no catalyst for it to rise. But a positive earnings release, a new product announcement or other big news can spark excitement in the company’s prospects and the stock. Then, the stock may shoot up dramatically in heavy volume, triggering a buy point.
Stocks can move quickly on momentum, so you need to act as soon as it hits the buy point to achieve optimal profit. If you drag your feet and wait until it goes up 5% or 10%, or even more, you may get in right before it has a sharp yet perfectly normal pullback after a big move.
Investors may think buying at a new high is counterintuitive to what they’ve been taught, so let’s dive into it.
Breakouts can occur in various bases, and a strong breakout should almost jump out at you and scream “buy.”
IBD research on decades of huge stock market winners has repeatedly uncovered this investing truth: Breakout volume should be explosive, with a minimum of 40% to 50% above the stock’s average turnover over the past 50 sessions. Volume often rises by hundreds of percent, although large-cap stocks may produce milder volume increases. Institutions start buying and push the volume up on their big purchases.
Meanwhile, heavy volume can occur a day or two after the actual breakout as new investors pile in on the move. Or, the breakout may have started out on a lackluster trading day.
Celsius’ Stock Breakout Makes Triple-Digit Gains
A textbook breakout example: Let’s check out Celsius (CELH) from August to November 2020.
CELH was in a 12-week consolidation pattern with a buy point of 26.86. You can clearly see the beginning of the base on the chart (1). The stock had been wavering, and CELH dipped below the 50-day moving average several times. Yet the sideways action proved constructive overall.
The stock then exploded 29%, breaking out to new highs on Nov. 12, after a positive Q3 earnings report. As the daily chart shows, share volume in Celsius spiked 538% above normal levels (2). That day’s volume bar spiked well above the 50-day moving average (3). The surge triggered the 26.76 entry, found by adding 10 cents to the left-side high of the base. Shares finished the day at 31.96 and closed in the high end of the day’s range, another positive sign.
The stock went on for a tremendous run through Jan. 20, 2021, gaining a whopping 163% in just over two months, before it headed south.
Beware that this strategy is for uptrend markets, as bear-market breakouts fail most of the time, according to William O’Neil’s “How to Make Money in Stocks.”
This article was originally published Dec. 23, 2022, and has been updated.
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