A stock that surpasses its support or resistance level is considered a breakout stock. These levels represent the price points that the stock has struggled to move beyond during a specific period. Breakouts are seen as a strong indicator that the stock is likely to continue its trend.
However, identifying breakout stocks that will perform well in the future can be challenging. To spot potential winners, a combination of analysis and intuition is necessary. And having a good investment advisor helps, too.
Here are seven ways to identify and profit from potential breakout stocks.
1. Look for companies with a competitive advantage
If you want to find stocks that might exceed their resistance level, focus on companies with a competitive advantage. These companies are more likely to outperform their peers, increasing the chance of a breakout. Look for companies with patented technology, strong brand recognition or unique business models. All these factors could give them an edge over their competitors, boosting the chance of a stock breakout.
2. Watch for key market trends
Anyone who deals in trading should keep an eye on market trends, and breakout stock traders are no exception. By keeping an eye on market trends, you can identify sectors that may experience growth in the near future. Pay attention to areas where demand is increasing, and where there is room for new players to enter the market.
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3. Monitor volume and price
One way to identify potential breakout stocks is by looking for those with increasing volume and price momentum. Breakout stocks often have a sudden surge in trading volume, which may indicate growing investor interest. Additionally, keep an eye out for stocks that are breaking through key resistance levels or forming bullish chart patterns, such as the cup-and-handle, ascending triangles or flag patterns.
The best brokers for stock trading can help you run screens to identify stocks that are showing unusual activity.
4. Identify companies with strong fundamentals
To identify promising companies, look for those with strong fundamentals, like increasing revenue, growing profits and positive cash flow. Those indicators suggest that they are doing well financially, and these companies tend to be more likely to break out. You can find these numbers in quarterly reports or with a web search for “(Company name) earnings.”
5. Track a stock’s relative strength
Even if a stock appears strong, remember that everything is relative. To evaluate a stock, it’s important to compare it to its sector or peers and ensure it is strong compared with other alternatives. The relative strength index (RSI) is a commonly used technical indicator for gauging the strength of a stock compared to its peers. Breakout stocks typically outperform the market and their sector, indicating the potential for further growth.
6. Keep an eye out for catalysts
Catalysts are recent developments that could drive stock prices upward. These could include successful product launches, favorable regulatory decisions or mergers and acquisitions. Also keep an eye out for positive earnings surprises and upward revisions in earnings estimates.
As you can see, anything that creates a positive outlook for the company’s earnings can contribute to a breakout.
7. Exit at your target price
Once the stock reaches your target price, it is advisable to exit the position and take your profits. Typically, stocks that break out beyond their resistance levels often come back down shortly after. This is one reason why it’s important not to drag your feet when it comes to exiting the position. When that time comes, be sure to move on and look for your next opportunity.
If you’re looking for an investment advisor in your area, Bankrate’s financial advisor matching tool can provide suggestions to get you started.
Bottom line
Although identifying breakout stocks is not an easy task, it can provide your portfolio with a significant advantage. Look for companies that appear strong by checking their fundamentals, comparing them to the market and seeking out companies with a competitive edge. These are just some of the ways you can profit from breakout stocks that are set to break past their resistance lines.
— Bankrate’s James Royal, Ph.D., contributed to an update of this article.
Editorial Disclaimer: All investors are advised to conduct their own independent research into investment strategies before making an investment decision. In addition, investors are advised that past investment product performance is no guarantee of future price appreciation.
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