Breaking Down a Breakout in Three Simple Steps

Whether it's Justify breaking out of the gate to win the Triple Crown or a stock breaking out to win profits in your account, breakouts are exciting.

Every trader hopes to find that secret recipe for a breakout that's typically the catalyst for a bull run on a stock while the rest of the crowd feeds prices as they chase the stock higher.

For more than a decade, I've eyed the charts and data to put together a combustible combination which serves as a fantastic model to identify the right time to buy ahead of a breakout.

Sometimes it really is as simple as one-two-three.

In fact, I've broken it down into three detailed steps to show you just how easy it can really be...

[mmpazkzone name="in-story" network="9794" site="307044" id="137008" type="4"]

Step No. 1: Chart or Technical Resistance

Technical analysis was once viewed as a sort of voodoo art.

The art of the science that is technical analysis has grown more effective as volumes of data have been made available to all investors.

You Have to See It to Believe It: The Night Trader's most powerful tool tells him exactly which stocks are set to go up tomorrow, the next day, the day after that, and beyond. And it is rarely ever wrong. Click here to learn more...

This has resulted in a market that is now much more aware of - and triggered by - technical moves.

Technicals to watch are typically round numbers, previous "resistance," and some specific trend lines, such as the 50- or 200-day moving averages.

Step No. 2: Increased Trading Activity

A breakout can only happen if there is an increase in the move of the stock. Think about the tree falling in the forest that nobody hears.

I'm always on the lookout for increases in trading volume in a stock or options as it approaches a potential breakout price. Think of it as a confidence booster.

The more stock and options volume trading I see on a stock as it approaches its breakout "trigger price," the better, as it indicates that a feeding frenzy is ready to occur while traders chase the stock higher.

Step No. 3: Additional Catalysts

Namely, these are a high short interest or an upcoming event, such as earnings.

In almost every case of a breakout, you'll see one of these act as the fuel for the breakout to occur. My favorite is short interest.

As a matter of fact, one of my Ten Commandments of Trading is "Short sellers are usually a bull's best friend."

This especially applies to breakouts. When a breakout occurs, short sellers suddenly realize that the stock is on a runaway course higher, and they dive into the market as buyers to cover their losing positions. This adds to the upside volatility move of a stock and follows through on the breakout to make it fast and aggressive.

The Breakout Stock of the Day

Recently, I issued a recommendation on Tanger Factory Outlet Centers Inc. (NYSE: SKT) to subscribers of my Night Trader system as shares of this REIT were heading towards a

classic breakout. Here’s the breakdown…

  1. Shares of SKT had run into resistance at the $23 level multiple times since March and had been rejected over and over. In addition, the REIT’s 200-day moving average was sitting at $23 as well. This indicated that the $23 level was a potential trigger price for a breakout rally.

skt tanger

  1. Volume on SKT saw a subtle increase earlier this week as the stock was approaching $23. This told me that the shares were seeing an increase in trading activity from the market.
  2. Multiple catalysts are in play on SKT right now.
  • The stock has seen a rise in its short interest ratio to readings of more than $23. This tells me that the shorts are ready to get pulled into a short-covering rally as their positions start losing money with the break above $23.
  • Interest rates have leveled off and moved lower, which makes the dividends paid by REITs more attractive.
  • Finally, the retail sector is leading the market as shoppers are heading out to the stores with more money in their pockets from the robust economy. This favors Tanger, which operates retail outlets.

Put all of this together, and you get a breakout in shares of Tanger Factory, as it's now cleared the $23 level and is gaining momentum.

In this case, the next level of resistance that the charts see is $25, but with momentum building and the buyers taking control of the REIT, the real payoff could be even more.

This Trader Is Betting It All: He Can Show You How to Turn $5,000 into AT LEAST $174,500

Chris Johnson is on pace to see 3,390% total winning gains this year.

And now, he's guaranteeing his recommendations will give you the chance to do the same.

If not, he's working for free.

So mark your calendar for one year from today...

Set a reminder on your phone...

And click here to learn how to join right now.

Follow Money Morning on Facebook, Twitter, and LinkedIn.

About the Author

Chris Johnson (“CJ”), a seasoned equity and options analyst with nearly 30 years of experience, is celebrated for his quantitative expertise in quantifying investors’ sentiment to navigate Wall Street with a deeply rooted technical and contrarian trading style.

Read full bio