Our writers and editors used an internal natural language generation platform to assist with parts of this article, allowing them to focus on adding information that’s particularly useful. The article was reviewed, fact-checked and edited by our editorial staff before publication.
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 pass over a specific period of time. 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. Discovering potential winners requires a combination of analysis and intuition. Here are seven ways to identify and profit from potential breakout stocks.
1. Look for companies with a competitive advantage
To look for stocks that could exceed their resistance levels, focus on companies with a competitive advantage. These companies are more likely to outperform their peers, increasing the likelihood of a breakout. Look for companies with proprietary technology, strong brand recognition or unique business models. All of these factors can give them an edge over their competitors, increasing the likelihood of a stock breakout.
2. Pay attention to key market trends
Anyone who trades stocks needs to 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 could 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.
3. Monitor volume and price
One way to identify potential breakout stocks is to look for stocks with increasing volume and price momentum. Breakout stocks often have a sudden increase in trading volume, which can indicate growing investor interest. Additionally, keep an eye on stocks that are breaking major resistance levels or forming bullish chart patterns, such as the cup-and-handle, ascending triangles, or flag patterns.
4. Identify companies with strong fundamentals
To identify promising companies, look for companies with strong fundamentals, such as increasing sales, growing profits and positive cash flow. These indicators indicate that they are doing well financially, and that these companies are more likely to break out. You can find these figures in quarterly reports or by searching the Internet for “(Company Name) Revenues.”
5. Track a stock’s relative strength
Even if a stock seems strong, remember that everything is relative. To assess a stock, it is important to compare it with its sector or peers and make sure it is strong compared to other alternatives. Breakout stocks typically outperform the market and their sector, indicating the potential for further growth. The relative strength index (RSI) is a commonly used technical indicator to measure the strength of a stock compared to its peers.
6. Pay attention to catalytic converters
Catalysts are recent developments that can boost stock prices. This could include successful product launches, favorable regulatory decisions or mergers and acquisitions. Also keep an eye on positive earnings surprises and upward earnings estimate revisions.
As you can see, anything that creates a positive outlook for corporate earnings can contribute to a breakout.
7. Close at your target price
Once the stock reaches your target price, it is advisable to exit the position and take your profits. Normally, stocks that rise above their resistance level often fall again shortly afterwards. This is one reason why it is important not to drag your feet when it comes to leaving the position. When that time comes, make sure you move on and look for your next opportunity.
In short
While identifying breakout stocks is not an easy task, it can provide your portfolio with a significant benefit. Look for companies that appear strong by checking their fundamentals, comparing them to the market and looking for companies with a competitive advantage. These are just some of the ways you can profit from breakout stocks that are about to cross their resistance lines.
Editorial Disclaimer: All investors are advised to conduct their own independent research into investment strategies before making any investment decision. In addition, investors are advised that the past performance of investment products does not guarantee future price increases.
