Breakouts, Price Reversals, and Stock Surge Patterns
We scan thousands of stocks to find breakouts, price reversals, and stocks that are surging in price. These patterns are very attractive to traders. Stocks that have just had a breakout have overcome overhead resistance. Investor interest in them is very high. There are enough new "believers" in the stock to more than buy up all the shares being sold by those wanting to get out at the area of "resistance." For that reason, breakouts attract attention and even more buyers. Prices often accelerate or surge on a breakout.
We scan for price reversals because they also attract attention. For this scan, we are most interested in stocks that are starting to surge after their short-term moving average has changed from trending downward to trending upward. When a stock has been in a prolonged downtrend, a great deal of pessimism has been factored into the stock's price. Usually long trends generate downside momentum and the selling has become somewhat overdone. Changing the stock's direction is like changing the direction of an ocean liner. Therefore, when a price reversal occurs, traders are interested. Why? Because the reversal means there has been enough new buying interest to absorb and reverse all that negative momentum. By definition, a price reversal occurs at the early stage of a new trend. Most people want to buy at the beginning of a new trend, especially if the price begins to surge.
Price surges are located by our scanner because stocks that are surging in price also draw new attention. A price surge results when there is a sudden influx of new buy orders. New buying interest may be the result of higher earnings expectations, a new product, a favorable FDA ruling, a new cure or discovery, or some other exciting news. The price surge is the mark of new investor enthusiasm for the prospects of a company. Traders love to buy a stock that has just had a price or momentum surge because a surging stock enables them to obtain a greater return in less time with less risk.
The price reversals and surge components of this scanner do not require that a stock be in a trading range with upper and lower boundaries just before the alert is given. However, our algorithm has a subroutine that does look for that kind of breakout. The subroutine looks for stocks that have been in consolidation. Those stocks have repeatedly been turned back by resistance at the upper boundary of the trading range. Because they are the subject of considerable investor interest, they do not decline far when they are turned back by that resistance. In other words, they are in a relatively narrow trading range (chart illustrations are at the bottom of this page). Eventually, buying interest builds until the stock is able to break through that overhead resistance. This scanner looks for all of the above (reversals, surges, and breakouts). Therefore, some stocks may be listed because they have broken out of a trading range, some may have just had a non-trading range "breakout," and others may be listed for reasons other than a breakout (as described above).
Note: Because the algorithms are scanning for several patterns, you may find that a stock is included on the alert list that had a breakout a week or more ago, and you might consider the alert to be a little late. In that case, ask yourself if the alert was generated for some other reason. For example, the stock may have made the list because of a recent price surge rather than because of a breakout. A breakout or reversal may have happened a week or more ago and may have generated an alert at that time, but the stock may be back on the list for another reason that would make the alert timely. Our algorithms can detect several patterns that would make a stock an "item of interest." Stocks that surge after a recent reversal or after exceeding a previous high would definitely be items of interest. The alerts are not buy signals. They are intended to draw attention to situations that warrant a closer look. It will be up to you to decide whether or not the pattern is of sufficient interest to you to act on it.
The following is a sample of the kind of list generated by this scan. Lists include the symbol, name, date of posting, closing price, percent change in price, and the percent change in volume. A stock may remain on the list a few days after it first appears. The lists now differ from the following list in that stocks are listed in the order of their volume surge (those with the greatest volume surge are at the top of the list).
Although we do not provide charts, we want to illustrate the kind of patterns that are detected by our algorithms. The following charts are of the stocks in the above list at the time the list was generated. Two sets of 9 charts each are displayed below instead of the 19 on the list simply because 18 fit better on the page. The names were omitted from the charts to provide more space for the chart and because the names are not really important. There are all kinds of great setups here. We have not drawn lines to help you see them, but you would almost have to be blind not to see the cup and handle formations, new highs, consolidation-surge combinations, or breakouts through resistance among these charts. The scan picks up other interesting patterns, including the inverted head and shoulders pattern. Most of these patterns can be extremely good vehicles for profit.
Below are three charts that illustrate the "breakout" patterns this scanner can detect. These stocks were found on a more recent scan than the scan that found the above stocks. On any given scan date, there may not be any stocks that fit a specific looked-for pattern (even though we scan thousands). Remember that the purpose of a scanner is to save time. To find all the stocks that have had a breakout, for example, would be an overwhelming task without using a search algorithm. However, the scanner cannot find a pattern that does not exist in the market at the time. Another point worth mentioning is that algorithms are mathematical equations. They cannot "see" nuances that are obvious to a human. Two patterns may look the same to a human, but the algorithm may find one and not the other. This can happen because the missed stock falls just outsided the parameters of the algorithm. The algorithms have been tested and refined so that they represent a good compromise in the search variables. For example, changing a single variable a little may permit the detection of another attractive stock but allow far too many others through the screen that are not attractive at all. No algorithm is perfect.
The first chart below shows a breakout after a period of consolidation. The algorithm was looking at closing prices rather than highs. Look at the last three candlesticks in the chart. The algorithm would detect this stock on any of the last three days because on those days the closing price was above the highest closing price during the previous 30 market days or more (at least 1½ months or six market weeks). At the same time, volume surged 20% or more above its average volume for the previous 10 days. The breakout algorithm in this scanner also has a component that requires the stock to be in a trading range with an upper and lower boundary (as illustrated). The light curvy lines in the chart are Bollinger bands.
All three of these charts were found on the same day. There were others as well. Below is a stock that remained in a narrow trading range for 58 days before breaking out. Volume surged on the breakout. The scanner would detect the stock on either of the last two days.
Note the little red arrow above the upper blue horizontal line. That appears to be a false breakout because the closing price is above the highest closing price during the previous 30 trading days. However, this stock would not have appeared on the scanner's list because the volume did not surge on that day. If volume had surged, it would be an example of a false breakout. False breakouts can happen. If the volume had surged, the scanner would have listed this stock that day whether it used closing prices or highs. If we were to change the algorithm so that it requires a greater penetration of the upper boundary, false breakouts would still occur. They can be identified only by hindsight. Think about stop losses for a moment. No matter where you put them, you will still have a few stops triggered just before a rebound. Breakout signals are like that. No matter how you define a breakout, there will occasionally be false signals. Of course, you could require additional filters. For example, on noting the appearance of a stock on our breakout list you could require it to push through the overhead resistance a little further, require that the breakout condition continue for two or more days, or require the satisfaction of some other screening condition before considering it to be a purchase candidate. Another option is that you could wait to see if the next surge after the pullback results in a true breakout. All we can do is note that the breakout has occurred. In this particular case, no signal was given on the day marked by the red arrow. On the following day, volume did surge but the stock had already closed lower. The volume surge requirement prevented a false signal.
The following chart shows a stock that had previously been higher, plunged, consolidated, and then had a breakout with an increase in volume. The Bollinger bands were in a "squeeze" when the breakout occurred. The algorithm is designed in such a way that it will keep listing a stock that has had a "breakout" until a pullback occurs. Some traders who miss an initial breakout prefer to buy after a pullback and purchase if there is a confirmation of the original breakout. The continued reporting helps such traders remain updated about the stock's progress. However, as soon as the pullback begins, the stock will cease to be listed in the reports because it will no longer satisfy the breakout filtering conditions looked for by the algorithm. The stock will not appear on the list again until its closing price exceeds the closing high reached before the pullback (confirming that the previous breakout has "legs").
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