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Reversal Patterns

Let Breakout And Reversal Stock Picks
Boost Your Trading Profits!

Stock breakouts and reversals provide you with explosive stock trading opportunities, allowing you to profit when stocks are up, as well as when stocks bottom out and are ripe for a rebound.

BREAKOUT STOCKS

Stocks form certain time-tested chart patterns, just before "breaking out" to new highs. At Stock Confidential, we are constantly on the lookout for market-leading stocks that are forming cup and handle, double bottom, flat base and other explosive chart patterns, so that our subscribers can profit from a stock's potentially dramatic price increase.

The three most important things we look for in potential breakout stocks are: 1) A stock with solid fundamentals, 2) A potentially explosive stock chart pattern, and 3) Well above-average breakout volume.

Solid Fundamentals

Most of the companies we feature rank in the 80's or 90's in EPS (earnings per share) and RS (relative price strength) as ranked by Investors Business Daily. These are generally considered the market's best-performing stocks. But we look at other criteria too. Hi-Tech Pharmacal (symbol: HITK), for example, had a 98 EPS rating and a 99 RS rating when we featured it in Stock Confidential. It also showed an "A" accumulation ranking, meaning there was an abundance of buyers of the stock, and its industry group also was rated an "A."

A Potentially Explosive Chart Pattern

Since we monitor hundreds of quality stocks like Hi-Tech Pharmacal, HITK was already on our radar screen when we saw it form a potentially explosive "cup and handle" above its initial breakout from a "double bottom" chart pattern. From this chart, and the stock's decreasing volume, it seemed clear that the stock was setting up to break through a price resistance area around $20.07.

On the day of its breakout, HITK shot up to $21.47, $1.40 above our $20.07 pivot/buy price. By day two, it was up to $22.56, or $2.49 above its pivot. Less than a week after its breakout, HITK closed at $27.45, $7.38 above its pivot!

Well Above-Average Breakout Volume

But what would you have noticed about HITK on the day of its breakout other than the fact that the stock was approaching our $20.07 pivot/buy price? The answer lies in the stock's volume. This is what we sent to our subscribers:

Potential Breakout Stocks

Symbol	Company	$Pivot	$Cur. Price	Avg. Daily Vol.
HITK	Hi-Tech Pharmacal	20.07	18.45	118K

This told our subscribers to be expecting HITK to hit the $20.07 buy point, or "pivot," on well above the 118,000-share-per-day level the stock was averaging. Let's add a volume chart below the price action of HITK, so we can visualize the stock's breakout volume.

Prior to its breakout, with few exceptions, HITK's volume stayed pretty close to the black line going across the bottom of the volume chart. This line is the stock's volume, or number of daily shares traded, in the form of a 50-day moving average. (The moving average just averages the volume over the last 50 days and puts the information in the form of a line).

On its breakout day, HITK racked up an impressive 628,900 shares (see first "up" arrow), or five times its average daily volume! So from the beginning of that market day, you would have noticed HITK approaching its pivot, or "buy point," on volume that was clearly pacing well ahead of its daily average. A few days later the stock showed extreme strength as its volume spiked above its initial breakout volume.

Here is HITK's chart several days later. Had you bought HITK at or near its pivot, you would have bought it just as it started to head up in a big way.

Breakouts are a great way to enter quality stocks, because they can help determine when a market-leading stock is most likely to see an explosive price increase. They often act as a final proving ground for quality stocks before they take off.

Like all stocks, breakout stocks tend to follow the strength of the overall market. In weak or uncertain markets, fewer stocks break out, and sometimes those that do can breakout above their pivots only to retreat back to them or below them until conditions improve. In strong markets, breakouts can be very powerful, accompanied by a dramatic increase in the stock's value.

REVERSAL STOCKS

Leading stocks suffer from bouts of selling just like other stocks. This selling pressure can be created by market downturns, analyst downgrades, negative news about the stock, or a sector temporarily falling out of favor, etc. At Stock Confidential, we examine these downturns for signs that the stock is ready to head back up again.

We look for several things in our featured reversal stocks. These include 1) A stock with solid fundamentals or leadership potential, 2) A stock that is reaching an area of price support, such as its 20, 50, or 200-day moving average, 3) Recent climactic volume, and 4) A stock that is forming one or more candle reversal patterns.

Solid Fundamentals or Leadership Potential

Most of the reversal stocks we feature rank in the 80's or 90's in EPS (earnings per share) and RS (relative price strength) as ranked by Investors Business Daily. These are generally considered the market's best-performing stocks. But we also occasionally consider past winners that are trying to regain their dominance.

Varian Medical Systems (symbol: VAR) sported a 94 EPS (earnings per share) rating and a 92 RS (relative price strength) reading when we saw its shares plummet for some unknown reason. Moreover, the stock was in one of the market's strongest industry groups with an "A" rating in this category, and it had a solid "B" accumulation rating, so there was no lack of potential buyers for the stock.

Reaching an Area of Price Support

VAR slashed below its 50-day moving average (the bright green line), an area of support for the stock in the past. Large institutional investors (mutual funds, investment houses, etc.) typically buy quality stocks at or near their 50-day moving averages.

Recent Climactic Volume

In addition to hitting a traditional support area, the stock experienced huge, climactic volume (see the "up" arrow in the volume portion of the above chart). Seeing this in the absence of any news or other factual reason for the stock's decline, we featured VAR at a buy point slightly above its close at $49.15.

Since reversal stocks are riskier to trade than breakout stocks, and can take longer to turn around and head back up again than expected, VAR dropped another $1.55 the day after we featured it. But the day after that, the stock gapped up $4.84, tacked on another .92 the day after that and another .78 after that. Had you sold the stock four days after we featured it, you would have pocketed a $4.89 gain!

Candle Reversal Patterns

Sometimes, a stock will flash one or more candle reversal patterns in addition to the other technical criteria discussed above, just before it potentially turns and heads back up again. Here's Avocent (Symbol: AVCT), descending below its 50-day moving average support area (bright green line). There is no climactic volume, but the stock has formed an inverted hammer/doji after several big down days.

Having exhausted its downward momentum, Avocent was now free to head back up above its 50-day moving average in a big way. From its $21.89 close on the day it formed the inverted hammer/doji, to its close just seven days later, it notched a $5.52 price move. For more on candle reversal patterns click on this link.

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