Sometimes Wall Street pros refer to an event known as a “breakout.” For those unfamiliar with the term, here is what it means and why it matters to investors.
A breakout refers to a pattern in a price chart where the price of a stock breaches a previously unbroken level or a level that hasn’t been breached in a long time, says JC Parets, founder of technical-analysis service AllStarCharts.com. Put simply, the price has “broken out” of a previously defined trading range.
The first part of the pattern starts when a stock rallies to a certain level, but then retreats, Mr. Parets says. “What happens is that there is an overwhelming amount of supply at that price level,” he says, meaning investors dump the stock, sending the price lower. A recent example is ETF , which tracks a basket of financial stocks. In 2007, before the financial crisis the ETF reached a then-record price of around $31 a share. It traded lower than that for 12 years and didn’t revisit $31 until late 2019. It retreated once again as the Covid-19 pandemic and lockdowns sent stocks reeling in early 2020. The ETF’s eventual breakout came earlier this year when the price broke through the $31 level. It recently was trading at around $37.
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