How to Trade Stocks: Breakout Spreads and the Art of Breakout


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A breakaway spread is the quintessential escape.

Usually driven by events, such as a strong earnings report, these price gaps can send a stock catapult off a good base. Why do they occur? Buying demand so far exceeds supply at the current price that the stock must rise enough to convince holders to sell their shares and meet the strong demand.

When the markets close on a spread day, it’s not uncommon to see a higher quality stock rise by at least 20%. The volume tends to increase well above average. This leaves you in no doubt that this stock is going higher, much higher.

Let’s take a look at LinkedIn in 2013. The social networking site for professionals and recruiters debuted in May 2011. Five years later, it was acquired by Microsoft (MSFT) in June 2016.

LinkedIn had a phenomenal foundational story. Significant profits and sales gains confirmed this thesis.

On January 10, 2013, LinkedIn broke out of a classic 16-week handle cup basis with a buy point of 117.42. Positives from the base included six straight weeks on the right side of base and a tight three-week pattern in the grip. In the last quarter, profits and sales increased 267% and 81%, respectively, compared to a year ago.

On the day of the breakout, the stock rose almost 4%. Volume rose 54% above its 50-day average. With earnings release several weeks away, the stock oscillated in and out of the 5% buy range until it was launched 21% higher on February 8. Volume jumped more than 600% above average as institutions flocked to the action.

There is a direct correlation between power and distance; the more power there is at the start, the higher the stock can go. Since markets closed on its breakout spread, it has risen another 34% before the stock formed a new cut base. Even at all-time highs, the stock had plenty of upside potential.

If a stock is deviating so badly that it is not trading within 5% of the appropriate buy point, you can go ahead and buy stocks as close to the open price as possible. But make sure it has the fundamentals to be a true market leader. It should be #1 in its industry group, and the market should be in a new young and confirmed uptrend. The Big Picture column gives you an idea of ​​the current market situation.

Since we are in earnings season, it is even more important to keep an eye on the major stocks and their earnings announcement dates. MarketSmith, a premium stock charting and stock picking product from Investors.com, provides listings that look for new gaps like the one made at the end of January 25 this year by MarketAxess (MKTX).

Once again, an earnings surprise set the stage for this stock’s big breakout. With a huge gap on a double bottom basis on January 25, the stock broke above its entry of 172.53 on 165% above average volume. The next day the stock was extended; through Thursday’s close at 188.10, MarketAxess moved more than 9% above that entry. (The chart above is a weekly chart; please see a historical daily chart at MarketSmith to see the actual breakout.)

Unless you’re ‘Johnny-on-the-spot’, you missed it.

MarketAxess rebounded 22% to hit a high of 211.06 in June, allowing holders to lock in gains based on IBD’s highest breach type sell rule.

This is why access to MarketSmith and its “Breakaway Gap” list, as well as other IBD lists, such as IBD 50 and Big Cap 20, can be so critical to successful stock market research.

( A version of this column originally published February 3, 2017 on Investors.com. )

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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