How Monstrous Volume Powered This Breakout Stock To Our 37% Gain
Dec 03, 2013
After a bit of a blogging break over the Thanksgiving holiday week, we’re back. Miss us?
Today, we walk you through the anatomy of a volume-driven breakout stock trade from¬ The Wagner Daily newsletter that led to a 37% gain over a 1-month holding period.
When doing our nightly stock scanning research, both manually and with the MTG Stock Screener, one thing that always catches our attention is a stock that suddenly jumps sharply higher on a massive volume spike.
Volume Powers Chinese Internet Stock Rocket
In the first half of August, Bitauto Holdings ($BITA) rocketed approx. 40% higher in just two days. More importantly, volume surged to more than 700% its average daily level.
That monstrous uptick in volume was a key signal because it clearly pointed to¬ institutional accumulation, which acts as a gas pedal that powers the best stock breakouts.
Additionally, such big volume acts as a leading indicator that points to the likelihood of further price appreciation. Here is a snapshot of that initial, high-momentum breakout action:
Obviously, the above price and volume action definitely caught our attention. As a bonus, we liked that $BITA also belonged to an industry sector that was showing a lot of relative strength at the time (Chinese Internet/technology).
Nevertheless, whenever a stock breaks out and zooms 40% higher over just a few days, we know this type of move usually requires at least a few weeks for the price to settle down and build another base of consolidation (click here to learn how the best stocks build valid bases before breaking out).
Although there are exceptions, most stocks demonstrating such swift breakout momentum simply cannot immediately provide us with a low-risk entry point that provides a positive reward to risk ratio.
But the good news is that such powerful, high-volume¬ breakouts from valid bases of consolidation merely set the stage for much greater price gains to come.
The Breakout Buy Setup
After the initial move out in $BITA, we put this high-momentum stock on our watchlist to observe subsequent price and volume action.
Specifically, we were now looking for a base of consolidation to develop over the next 2 to 5 weeks, which would set the stage for another breakout entry.
The buy entry in our newsletter and managed accounts finally came on September 5, when we bought $BITA at $14.48 (just above the short-term downtrend line that had developed):
Our buy entry was confirmed by a big volume spike (shown above), and was also preceded by five days of tight-ranged trading (including an inside day immediately prior to our September 5 buy entry).
The best and most reliable stock breakouts are usually preceded by a tightening of price action for at least several days before breaking out of their bases of consolidation, and the price action of $BITA fit the bill.
Next, let’s take a look at what happened after our breakout buy entry:
Within nine days of buying the stock, the price had drifted back down to our initial buy entry (the pink horizontal line on the chart above).
However, we were not concerned because a subsequent pullback to new support of the breakout level is relatively common, and has the benefit of shaking out the “weak hands.”
Also, the pullback was not of consequence because the price action was still tight and basing out, while never really breaking below near-term support of its 20-day exponential moving average.
Above all, our protective stop was already in place at the time of buy entry (just below the prior “swing low”), and we were relaxed because of our zen-like “set it and forget it” approach to placing stops.
Riding The Volume Wave To Trading Profits
After the mid-September pullback that followed our breakout buy, buyers stepped back into the stock, and bullish momentum again caused $BITA to explode¬†40% higher just six days after breaking out above the highs of the base (note the breakout volume spikes on October 1 and 2).
After the price of $BITA spiked above the $20 level, we made a judgment call to trail a tight stop below the prior day’s low in order to lock in gains in the event of a sharp pullback.
On October 8, $BITA finally broke below the prior day’s low and hit our trailing stop, enabling us to lock in a solid 37% gain on a one-month swing trade.
Wash, Rinse, Repeat
As is frequently detailed on this blog, stocks and ETFs trading at new 52-week or all-time highs typically repeat the “base, breakout, base, breakout” cycle several times before eventually entering into a substantial correction, as there is a complete lack of overhead supply (no technical price resistance).
As such, it’s not surprising that $BITA subsequently built yet another four-week base, then broke out again (the stock is currently trading around $32).
In this case, we did not re-enter $BITA after the next base that formed. However, we frequently do re-enter the strongest stocks through buying each base breakout, then selling into strength before the next base forms.
To profit alongside of our next big breakout play, get started today with your 30-day risk-free subscription to The Wagner Daily swing trading service.¬