Breakout from a base

The idea

When a strong stock spends weeks moving sideways in a tight range (a base), supply is being absorbed. The break above the top of that range (the pivot) on heavier volume is often where the next leg starts.

What I look for

• A leading name: strong relative strength, often on leadership lists such as IBD's.
• A base of roughly five weeks or more, ideally tightening toward the right side.
• A clean move through the pivot with volume above average on the breakout day.
• A market that supports breakouts. In a weak tape most of them fail.

The trade

• Entry: through the pivot, not far above it. Chasing widens the stop.
• Stop: under the low of the breakout day.
• Management: trim a portion within the first few days if it works, then move the stop to break-even. Add only if a new base forms. No adding to an extended move.

Watch out for

Thin names gap. A breakout in a low-volume stock can reverse through the stop overnight. See gap risk.