How To Trade Growth Stocks: This Should Happen In Every Great Breakout

In America, most moviegoers must have a bag of popcorn while watching. In growth stocks, what’s the one thing you must have for an outstanding breakout?

X

Volume. Lots of it.

If the amount of shares traded on breakout day, or a few days afterward, surges well above normal levels, your confidence in the stock should grow. As a stock bolts out of a good double bottom or other type of base, heavy turnover means this: The big guns on Wall Street are accumulating shares big time. They’re willing to pay up.

What are “normal levels?”

IBD calculates a 50-day average daily share volume and plots it as a thin red line on daily charts. So you can quickly see if volume was heavy, flat or light on any trading day. Just compare the height of the volume bar for that day with the 50-day line itself.

At Investors.com, open up a daily chart and click on any price-and-volume bar. A pop-up data box shows the volume that day and how it compares with average volume. Ideally, volume on the breakout day should be at least 40% above the 50-day average. For small and midcap stocks, volume might double, triple or even quadruple.

Big Breakout, Texan-Style

Texas Instruments (TXN) flashed a picture-perfect breakout on Sept. 15.

After peaking on June 9 of last year at 84.65 (1), the semiconductor play cooled off for three weeks, hitting bottom at 75.92. The 10.3% drop from head to toe was unusually shallow for a typical cup with handle. Yet, it carved the pattern well. Notice how the nearly four weeks up in price, formed the cup’s right side. The handle was also quite long, but it showed a dry-up in volume (2). Note the bullish support along the 50-day moving average.

On the breakout, the market was in a confirmed uptrend. (Always check in the Big Picture column). TI rallied 1.9% and rolled past the 84.34 buy point (10 cents above the handle’s highest price). See how the volume bar soared well above the 50-day moving average line (3)? Mutual funds, banks, pension funds and the like furiously snatched shares. Turnover soared 154% above its average 4.06 million shares to 10.3 million.

TI briefly pulled back three days later in above-average trade (4), but it paled vs. the breakout volume. Plus, the Dallas-based firm held above the proper buy point. No reason to sell.

Different Chart Pattern, Same Result

Could you have viewed TI’s base as a flat base as well? No problem. With an 84.75 buy point, the breakout day was the same.

Want an easy way to discover future breakouts? Check IBD’s Stocks On The Move table. It shows stock posting the heaviest changes in volume — in real time.

(Please follow Saito-Chung on Twitter at @IBD_DChung for more commentary on bases, chart patterns, buy points, and sell signals.)

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