A breakaway gap is the quintessential breakout and a crucial part of stock analysis. Don’t ignore these gaps up in price when you want to find the best growth stocks and buy them at the correct time.
Typically event-driven, such as a strong earnings report, these price gaps can send a stock catapulting out of a good base. Why do they occur? Buying demand surpasses the available supply of shares to be sold so much that the stock has to rise high enough in price to convince holders to sell their shares and match the heavy demand.
By the close of trading on a gap-up day, it’s not unusual to see a leadership-quality stock rise at least 20%. Volume tends to surge well above average. It leaves you with no doubt that this stock is going higher, much higher.
Let’s take a look at LinkedIn back in 2013. The social networking site for professionals and recruiters debuted in May 2011. (Five years later, it was bought out by Microsoft (MSFT), in June 2016.)
LinkedIn had a phenomenal fundamental story. Large earnings and sales gains confirmed that thesis.
Growth Stocks And How The Breakway Gap Works
On Jan. 10, 2013, LinkedIn broke out of a classic 16-week cup with handle with a 117.42 buy point. The base’s positives included six consecutive up weeks on the right side of the base and a three-weeks-tight pattern within the handle. In the most recent quarter, earnings and sales were up a whopping 267% and 81%, respectively, vs. a year ago.
On the breakout day, the stock staged a small price gap up and rose almost 4%. Volume increased 54% above its 50-day average. With an earnings release several weeks away, the stock meandered in and out of the 5% buy range until it launched 21% higher on Feb. 8 (1). Volume surged more than 600% above average as institutions flooded into the stock.
Often, there is a correlation between power and distance: The more power at the start, the higher the stock can go.
From the close of trading on its Feb. 8 breakaway gap, it ran up another 34% before the stock formed a new base.
Even at February all-time highs, the stock had plenty of potential.
If a stock gaps up so hard that it doesn’t trade within 5% of the proper buy point, you want to wait for the high price of the first five minutes to appear using an intraday five-minute bar. And buy shares as close as possible to that price, as the stock moves past that level.
But make sure it has the fundamentals to be a true market leader. It should be No. 1 in its industry group, and the market should be in a young, new confirmed uptrend.
The Big Picture column gives you a sense of the market’s current stage.
When Wall Street is in earnings season, it is even more important to keep an eye on leading stocks and their earnings announcement dates.
This Platform Accelerates The Search For Top Growth Stocks
Once again, an earnings surprise paved the way for this stock’s big breakout. With a huge gap up out of a flat base on Nov. 8, 2017, the stock surged past its 27.32 entry in volume more than seven times greater than average. That same day, the stock quickly became extended, but traded in the 5% buy range early in the morning.
Unless you’re Johnny-on-the-spot, you missed it.
Planet Fitness quickly rallied 28% to a high of 35.03 by late December, enabling holders to lock in gains based on IBD’s top offense-type sell rule before the stock’s next basing process.
A version of this column was originally published on Feb. 3, 2017, at Investors.com. Follow Lehtonen on Twitter at @IBD_SLehtonen for more on stock market analysis and insight.
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