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  • Identifying and Understanding Price Breakouts

    October, 2011

    A price breakout can be one of the most critical points to look for in any stock. This is a point where the value of a stock goes beyond the general value that the stock normally trades at. In most cases a stock will have an extremely difficult time going over or under a resistance band - the price level of a stock where it tends not to trade either above or below.

    When a stock's value does go beyond the resistance band and price breakout occurs, generally the price will then go up (or down) faster than usual in the direction of the breakout. In many cases the price will stay above (or below) the resistance level for days or weeks.

    The breakout can occur for many reasons. In many cases it can involve customer sentiment in the market. In other cases it might be due to a major event that occurred within the company itself, or the industry.

    To determine the resistance band, we must look back at the stocks history. The resistance band will be established by averaging the peaks (or dips) that a stock reaches. This may form a flat line, or an elevating or declining line over time.

    For stock traders, it's important to seek out breakouts for this is a signal that the stock is likely to increase or decrease in value for a while. (We say increasing of course when the stock breaks through the upper resistance level and decreasing when a stock drops below its lower resistance level). Knowing that a stock has a good chance of increasing or decreasing allows the trader to then make a relatively safe play, whether it be long for an increasing stock or short on a decreasing stock. A typical investor buys more stock when the price breaks out.

    This does not mean that a trader should assume that a price breakout is going to stay well over its original band. There is always a potential for the stock to return to its original pricing range. Also is the potential for the stock to work with a new series of resistance bands based on its new value.

    The price breakouts on a stock are important points to look for when determining potential future value of a stock. Catching a stock at the moment of its breakout is likely to give the investor favorable returns.

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    Kyle Sarwal is an investment expert and founder of

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