As we’ve mentioned in a previous post, when a market bottoms out and starts a new uptrend, it is a great time to start hunting for stocks breaking out. What are the scans in Investar that are useful for identifying such breakouts? As a general rule, all the “Volume Gainers” and “New Highs” are a great source of ideas (see screenshot below). Based on the 4th Nov trading session, we have identified a couple of stocks that are breaking out on high volume: RIIL and ONMOBILE. We had also elaborated the strategy and procedure in that post, but just as in other techniques in Technical Analysis, not all breakouts are successful.
So how do you maximize your chances of identifying a successful breakout? Make sure you are following these rules:
- Make sure the resistance level that the stock is breaking out is very clearly defined. In the screenshot below, you can see that RIIL has a much clearly-defined and strong resistance breakout compared to ONMOBILE where the resistance is not that well-defined. What do we mean by a strong resistance? There are many factors, and one of the most important ones (as past attendees to our “Basics of Technical Analysis” webinar will attest) is the number of touches made by the support/resistance line. The more the touches, the stronger is the support/resistance. From the screenshot, you can clearly see that the resistance that RIIL breaks out of has many more touches compared to ONMOBILE and hence is stronger. This is not to say that the ONMOBILE breakout will fail but the chances of the RIIL breakout succeeding are higher.
- Look for signs that a stock has corrected on lowered volume prior to a break-out (e.g., RIIL had gone up 5 days back and then corrected a bit on low volume). This is similar to the handle in William O’ Neil’s Cup-with-Handle Pattern but may be much shorter in duration. (Remember we are not waiting for a 52-week high to be made, unlike William O’ Neil’s technique).
- Make sure the volume on the day of breakout is significant (atleast 2-3 times the 50-day average). In Investar (see screenshot) this value is 397% for RIIL which means that it traded at almost 400% or four times the 50-day average.
- Buy as long as the stock is not too extended beyond the resistance (a max of 2-2.5%). The closing price of RIIL (Rs 429.85) looks like a good price to get in.