Technical analysts always notice when stocks breakout above resistance levels, but fear of the dreaded “false breakout” often leads them to view these moves with a certain level of skepticism. False breakouts occur when a stock briefly extends beyond a support or resistance level before quickly correcting to within its previous trend.
When a stock penetrates its resistance level, one of the first things technical analysts look at to confirm a legitimate breakout is trading volume. Although trading volume isn’t always a reliable indicator of a true breakout, it often shows that there are a number of traders buying into the move and supporting the stock. A low-volume breakout, on the other hand, can simply be a stock drifting above resistance in the short-term, a move that can be met with selling pressure.
Here’s a look at three names that have experienced high-volume breakouts recently that could be in for more gains to come.
Empire’s stock broke out in a major way in end-of-week trading, and the technical breakout shows several signs that the breakout is legitimate. First, Empire experienced its highest trading volume of the year by 11 AM on the day of its breakout, indicating that there is heavy buying behind the move.
In addition, Empire is on the brink of a golden cross, a bullish crossover of the 50-day simple moving average (SMA) above the 200-day SMA, within the next several trading days.
This high-volume breakout could be a sign that Empire is headed back to test its 2015 highs at the $30 level in coming weeks.
Finisar is another potential breakout stock, but its chart presents more of a caveat than Empire’s. There’s no question that the stock’s big end-of-week move catapulted it above its short-term resistance line, and the massive volume is also a bullish sign.
However, when Finisar’s stock jumped from the $14.50 level down to below $13 back in September, a large gap was created in its chart. The tendency for stocks to retrace during trends to eliminate gaps is called “gap filling” and can be an indicator that the move is only temporary. Finisar traders should be watching the stock’s follow-up moves very closely before getting too bullish on the stock.
The third high-volume breakout stock is MagneGas, which has broken out to new 52-week highs. A look at the weekly chart shows that MagneGas’s recent move is similar to the move that it logged back in May. Both moves came on high volume. The move in May was a push above resistance at the 50-day SMA, and the recent move has been a breakout above the 200-day SMA.
In the near-term, traders should watch out for a pullback similar to the one the stock experienced following its May breakout, but MagneGas has plenty of room for long-term upside if the stock eventually breaks out above its 2014 high of $2.45.
Disclosure: the author has no position in the stocks mentioned.
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