You know that feeling when a stock seems ready to blast off, but suddenly it’s like, “Wait, what happened?”
The stock broke out above a key level with what looked like nothing but blue skies above…
You might’ve thought, there’s no telling how high this can go…
But then it’s like it hits a brick wall and reverses … Not only going back to your entry but also breaking through your stop.
It was a failed breakout. And you’re left wondering if you did something wrong … Or if the setup just didn’t work…
To help you decipher between winning breakout plays and those that fail, I’m sharing 3 game-changing insights with you to help you avoid frustrating, false breakouts.
Get five of my tips to avoid fake-out breakouts here.
3 Signs Of A Fake-Out Breakout
If a stock looks set for a breakout, but fizzled out, it might have some or all of these warning signs…
Low Volume
Before you buy a breakout, check the stock’s daily volume. How much volume is it trading compared to its 60-day average?
And when the stock breaks the breakout level intraday — does volume come in?
If volume doesn’t come in when the stock breaks a key level — it means nobody cares.
Volume should increase as buyers come in to join the upward momentum, and short sellers buy to cover to exit their positions.
Remember, without enough volume, a stock won’t soar, even if short sellers are in the mix.
Large Float
I like low-float stocks because they have more potential to have explosive moves.
The float is the supply. And when there’s limited supply with high demand, the price can increase substantially.
On the other hand, a stock with a large float needs even more volume to make it move.
So don’t expect a large float stock to have a volatile move at a breakout level — unless it has impressive news and enough volume to sustain the move.
Otherwise, it’s more likely to fail at a resistance level as short sellers pressure it and have that key level as their risk.
History may not repeat, but it often rhymes. Check out the one-year chart for your potential trade. Look for significant moves in the recent past – ideally, you want to see some big moves to gauge the stock's potential.
— Timothy C. Bohen 🇺🇸 (@tbohen) January 18, 2024
Whole Dollar Level Overhead
If you’re looking to jump in a stock that’s breaking out, pay attention to where whole dollar levels are…
These are psychological levels that become important because traders believe they’re important. They become self-fulfilling prophecies…
So if you buy a breakout over $5.80, watch for how the stock reacts at $6 and be ready to adapt to price action.
It could fail if there are a lot of sellers at a whole dollar level.
The lesson here: If you’re a newer trader, patience is key when looking for breakouts.
Make sure the stock you’re watching checks the boxes.
Wait for a break move followed by consolidation or a dip to the breakout level. If it can hold the breakout level on a pullback, it can be added confirmation that the stock can go higher.
Being patient might mean you miss the odd trade where a stock explodes above a breakout level without a dip. But you’re not going to catch every trade.
What you’re trying to do is stack odds in your favor and cut out getting caught in fake-out breakouts.
That’s a wrap, for today! Catch you on the winning side of the trade.
Tim Bohen
Lead Trainer, StocksToTrade