Each proper base pattern has a specific buy point, which is usually a level of resistance. But what if the stock rises so much that it starts trading above the buy point, never making contact with it?
That's called a breakaway gap. You may think you've missed your chance to buy. But gap ups above buy points should give you the courage to buy. Breakaway gaps serve as a viable alternative entry for breakout stocks with strong fundamentals.
How To Catch The Breakaway Gap
Breakaway gaps involve a few key factors, the most important of which is a bullish price gap above the buy point and an explosion in volume. A price gap is created when the low of a day's price range bar is far above the prior day's high.
When it happens as a stock tops a buy point, investors should buy as close to the opening price as possible. But you should also analyze the gap by watching how the stock acts in the first five minutes of trading.
If shares can hold that initial gain, then the high of the first five minutes of trading can be used as a viable buy point. (MarketSmith includes 5-minute charts to do this.)
As with most other IBD setups, be sure not to chase a stock if it's already risen more than 5% above the buy point.
Breakaway gaps often occur right after a big news event or earnings release that catalyzes the move. By the close of trading on a gap-up day, it's not unusual to see some top-tier stocks rise at least 20%.
Picture Perfect Breakout Stocks: Zscaler
Back in 2020 when growth stocks were largely in favor, Zscaler rocketed 26% on Dec. 3 after reporting better-than-expected earnings (1). Zscaler is the biggest provider of cloud-based web security gateways that inspect data traffic for malware.
At the open, shares of the breakout stock were already well into the 5% buy zone of a 158.84 double bottom entry (2), according to IBD MarketSmith chart analysis. This opened the door to a breakaway gap opportunity.
The breakout's first 5-minute high of 165.85 could have been used to mark your entry (3). From this point, add 5% to get your buy range. The stock closed near its session high, while a 609% surge in volume compared to the daily average also supported the jump (4).
Shares paused to consolidate gains for a few weeks following the breakaway gap. Then on Dec. 17, the stock continued to power higher and reached a short-term high on Dec. 28. The stock gained a total of 28% from the initial breakaway gap entry.
The breakout also featured a relative strength line at new highs, which is also a bullish indicator.
Follow Fox on Twitter at @rachelgfox for more on breakout stocks and market insight.
