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Why Breakout Stocks?

Breakout stocks provide you, the stock trader, with some of the most explosive trading opportunities you'll ever experience. And when you combine stocks that are poised to break out, with solid fundamentals, why you've got the best of all possible worlds!

All stocks form the same time-tested chart patterns, just before moving to new highs. We constantly scour the market for leading stocks that are forming cup and handle, double bottom, flat base and other explosive chart patterns, so that our subscribers can profit from a stock's potentially dramatic price increase.

The three most important things we look for in potential breakout stocks are:

Stocks with SUPERIOR FUNDAMENTALS
Stocks forming potentially EXPLOSIVE CHART PATTERNS
Stocks with well ABOVE-AVERAGE Breakout VOLUME

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Superior Fundamentals

Most of the companies we feature rank in the 80's or 90's in EPS (earnings per share) and RS (relative price strength) as ranked by Investors Business Daily. These are generally considered the market's best-performing stocks. But we look at other criteria too. Hi-Tech Pharmacal (symbol: HITK), for example, had a 98 EPS rating and a 99 RS rating when we featured it in Stock Confidential. It also showed an "A" accumulation ranking, meaning there was an abundance of buyers of the stock, and its industry group also was rated an "A."

Potentially Explosive Chart Patterns

Since we monitor hundreds of potential breakout stocks, HITK was already on our radar screen when we saw it form a potentially explosive "cup and handle" above its initial breakout from a "double bottom" chart pattern. From this chart, and the stock's decreasing volume, it seemed clear that the stock was setting up to break through a price resistance area around $20.07.

On the day of its breakout, HITK shot up to $21.47, $1.40 above our $20.07 "pivot," or buy price. By day two, it was up to $22.56, or $2.49 above its pivot. Less than a week after its breakout, HITK closed at $27.45, $7.38 ABOVE ITS PIVOT!

breakout stocks chart 2

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Well Above-Average Breakout Volume

But what would you have noticed about HITK on the day of its breakout other than the fact that the stock was approaching our $20.07 pivot/buy price? The answer lies in the stock's volume. This is what we sent to our subscribers:

Potential Breakout Stocks

Symbol	Company	$Pivot	$Cur. Price	Avg. Daily Vol.
HITK	Hi-Tech Pharmacal	20.07	18.45	118K

This told our subscribers to be expecting HITK to hit the $20.07 buy point, or "pivot," on well above the 118,000-share-per-day level the stock was averaging. Let's add a volume chart below the price action of HITK, so we can visualize the stock's breakout volume.

breakout stocks chart 3

Prior to its breakout, with few exceptions, HITK's volume stayed pretty close to the black line going across the bottom of the volume chart. This line is the stock's volume, or number of daily shares traded, in the form of a 50-day moving average. (The moving average just averages the volume over the last 50 days and puts the information in the form of a line).

On its breakout day, HITK racked up an impressive 628,900 shares (see first "up" arrow), or FIVE TIMES its average daily volume! So from the beginning of that market day, you would have noticed HITK approaching its pivot, or "buy point," on volume that was clearly pacing well ahead of its daily average. A few days later the stock showed extreme strength as its volume spiked above its initial breakout volume.

breakout stocks chart 4

Here is HITK's chart several days later. Had you bought HITK at or near its pivot, you would have bought it just as it started to head up in a big way.

Breakout stocks are a great way to enter quality stocks, because they can help determine when a market-leading stock is most likely to see an explosive price increase. They often act as a final proving ground for quality stocks before they take off.

Like all stocks, breakout stocks tend to follow the strength of the overall market. In weak or uncertain markets, fewer stocks break out, and sometimes those that do can break out above their pivots only to retreat back to them or below them until conditions improve. In strong markets, very few stocks will create the kinds of big moves that are typical among breakout stocks.

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