How To Find The Best Stocks To Buy BEFORE They Breakout
How To Find The Best Stocks To Buy
BEFORE They Breakout
Overview of core beliefs
Swing trading in the near to intermediate-term timeframe
Trading with the intermediate-term trend
Momentum-based strategies work!
An object in motion tends to stay in motion
Stocks trading near 52-week highs have the least amount of
Cheap stocks are cheap for a reason
We buy high and sell higher, not buy low and sell high
Human nature is to underestimate how long a trend can last
Main structure of every uptrending stock is:
Base, Breakout, Pullback (rinse and repeat)
Primer To Buy Setups
Before a stock makes our breakout “watchlist,” it must satisfy
two key criteria:
1.) Stock must be in a clear and distinct uptrend
2.) Stock must have a valid basing pattern
Base Building –
The Key To Successful Breakouts!
Base building is like the foundation of a house
Base is crucial to an uptrend, as the stock builds a strong
foundation to launch the next advance
Before a stock can launch a big price run up, it must first
have a solid base pattern to build upon
Bases typically form after a stock/ETF has already
experienced a substantial price increase of at least 30%
Spotting A Valid Cup And Handle
Must form within an existing uptrend, AND stock must be at least
30-40% off the lows
The best cup and handle patterns form near 52-week highs
50-day moving average should be above 200-day moving average,
and 200-day moving average should have already been trending
higher for at least a few months
The base typically forms on a pullback of 20-35% off the highs
(deep correction), and is at least seven weeks in length
As the base rounds out and price returns back above the 50-day
moving average and holds, look for the “handle” to form (usually 5-
10% below the highs of the left side of the pattern)
Handle should drift lower, and is typically 5-10% or so in width.
Handles that retrace more than 15% are too volatile and prone to
Handles should be at least 5 days in length and NOT form below
the 50-day moving average.
Spotting A Valid Flat Base
As with the cup and handle type pattern, a flat base consolidation
must form within an existing uptrend. Typically, it will form after a
breakout from a deeper correction (such as a cup and handle).
The best way to identify a flat base is by using the weekly chart
timeframe. The majority of the base should form above the rising
10-week moving average (or 50-day moving average on daily
The 10-week moving average should be trading well above the 40-
week moving average.
A flat base should be at least 5 weeks in length.
Flat bases usually correct no more than 15% off the highs
The breakout entry and follow-through (example #2)
Secrets Of A Valid Basing Pattern
A base (or zone of congestion) is anywhere from 1 month to 1
year in length. For our style of trading, we prefer bases that form
in a 1 - 3 month period that find and hold support of the 50-day
We want to see “tight” price action in the base, especially during
the last two weeks before the breakout.
A valid base should pullback anywhere from 10 - 30% off the
swing high. Once a stock retraces 40 - 50% or more, we begin to
question the strength of the uptrend.
We must see a “higher low” form within the base. This is crucial
to the pattern. Without a higher low forming, we have no way to
set a stop and therefore can not define the risk.
Volume should be declining during a base, or at the very least, not
heavier than average. If there are too many days of heavy
volume selling in a base, the base could be faulty.
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