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CATEGORY Trading

How to Spot Breakout Potential



November 08, 2016

Chances are you’ve heard the term, “breakout.”

Stocks are either breaking out, meaning they’re breaking above prior resistance… or they’re breaking down below prior support.

The idea is that once a stock begins to break above prior resistance points, the stock has the potential to trend even higher… and that once thousands of traders learn about it, they pour in.

But the key to trading a breakout successfully is by being early.

Think of its like this.

When you’re stopped at a stoplight, you don’t try to predict when the light will go green.

Instead, you just hit the gas and hightail it out of there when it does.

The same approach happens with a stock. Once it breaks above prior resistance points, we don’t wait… we buy, hoping the breakout lasts. We’re simply for stocks where share prices have moved above prior price barriers created by incredible support and resistance points.

A perfect example is the Dow Transports.

It’s a great visual of the stoplight phenomenon.

The chart continued to stop the stock at overhead resistance since March 2016. Once the index broke above such heavy resistance, the stoplight turned green… and the index ran.

The key to buying wasn’t predicting the breakout – it was buying the actual resistance break.

One stock to keep on radar for example could be Visa (V:NYSE).

If you take a look at this chart of Visa, you’ll notice the stock has been in an uptrend for weeks, but recently stalling at heavy resistance at $84 a share.

Every time the stock swings lower and retests the $84 high, it fails.

Traders should now look for a potential breakout if on the latest test it manages to break above $84. If and when that happens, the stock could reach a new all-time high and trend higher.

 


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