Breakout Stocks

Given a choice between top stock picks that are poised to break out, and stocks with no breakout potential, which would YOU choose?   Why, stocks with break out potential, of course!

Breakout stocks provide you, the stock trader, with some of the most explosive trading opportunities you'll ever experience.   When you combine stocks that are poised to break out, with solid fundamentals, why you've got top stock picks that have the best of both worlds!

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

The three most important things we look for in my top stock picks are:

• Stocks with TOP QUALITY FUNDAMENTALS
• Stocks with BREAKOUT POTENTIAL
• Stocks with STRONG BREAKOUT VOLUME

Most of my featured breakout stocks rank in the 80's or 90's in EPS (earnings per share) as ranked by Investors Business Daily. These are generally considered the market's best-performing stocks. But I look at other criteria too, like a stock's relative price strength (RS), accumulation, industry strength, etc. Several years ago, when I featured Hi-Tech Pharmacal (symbol: HITK), it had a 98 EPS rating and a 99 RS rating. 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." I mention the stock now, only because its chart at that point in time is a perfect example of a stock setting up to break out.

Breakout Potential

Since I monitor hundreds of potential breakout stocks, at the time I featured it, HITK was already on my radar screen when I 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, this previous top stock pick shot up to $21.47, $1.40 above my $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!

Strong 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 I sent to my subscribers:

Potential Breakout Stocks

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.

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.

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 top stock picks, because they can help determine when a market-leading stock is most likely to see an explosive price increase.

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 break out above their buy points (or "pivots") can retreat back to them or below them until conditions improve. In strong markets, stock breakout activity is high, and a single week will see a number of breakout stocks.