As we all know, the price movement of any asset is determined by supply and demand. Demand and supply for an asset depend on many factors, which can be divided into three broad categories - fundamental, technical, and psychological.
In most cases, fundamental factors are primary in relation to other factors. Thus, it would be logical to determine which stocks would be classified as breakout stocks based on these factors.
Contents:
- Identifying stock breakout patterns with fundamental analysis
- Dividends and buybacks
- Market sector and news background
- There is more to come
Interact with the underlined words and green dots to get additional details and explanations.
Identifying stock breakout patterns with fundamental analysis
Fundamental analysis can be quite difficult to interpret, but it is often the most correct analysis for determining stock breakout patterns.
When analyzing stocks, it is imperative to pay attention to the following fundamental factors:
- Beta
- Dividends/buybacks
- Market sector
The first way to identify breakout stocks using fundamental analysis is to understand which phase of the economic cycle we are in and to buy/sell those stocks which will move ahead of that cycle. There can only be two cycles: economic growth or recession. In a growth cycle, GDP rises and unemployment falls.
Key rates in a growth cycle are low enough to allow stock markets to rise. Breakout stocks in this case will be those that grow faster and break through their resistance levels. In a recession, the opposite is true - GDP declines, unemployment usually rises and the central bank rushes to raise its key rate, which leads to lower stock markets.
Breakout stocks, in this case, are those stocks that will fall the hardest, i.e. consistently break down their support levels. In order to find such stocks, we need to pay attention to the beta-ratio and select those stocks whose beta will be maximal. These are the stocks that will move ahead of them. Let's take 
Meta (Facebook), 
Amazon, 
Apple, 
Netflix and 
Google (FAANG) as examples.
2022 is a down year for the economy. Inflation is rising, key rates are rising and stock markets are falling. In this case, it would be reasonable to open Down trades in stocks with the highest beta.
| Company | Beta (5y Monthly) | Growth during the last 6 month |
|---|---|---|
| Meta | 1.40 | -41.50% |
| Apple | 1.19 | -10.20% |
| Amazon | 1.25 | -16.30% |
| Netflix | 1.28 | -47% |
| Google | 1.10 | -12.60 |
As can be seen, the stocks with the highest beta are the ones that are falling the most. This means that a breakout of support levels in these stocks is more than likely. You can find information on beta stocks simply by searching 'Meta stocks beta' on Google.
Dividends and buybacks
All stocks can be roughly divided into two broad categories:
Growth stocks and value stocks.
Before dividends are paid, a so-called record date. The closer to the record date, the bigger the demand for the stock may be, as more investors will buy it to get their dividends. After the record date, however, the opposite may be true - an increase in supply. Because anyone who wanted to get dividends after the cut-off may rush to get rid of the stock. A surge in supply or demand could result in a breakdown of significant support or resistance levels.
Let's understand how this works using Apple stock as an example.
The Nasdaq website provides information on the last record date, which is 05/09. In order to receive the dividend, investors had to buy the stock two working days before this date, i.e., no later than 05/06 (05/07 and 05/08 were weekend days).
Thus, on the 6th of May there could have been a spike in activity in Apple shares in the market, after which demand should have fallen, which could have led to a breakdown of the level.
Let's take a look at the 15-minute chart below 🔽
As can be seen on the 9th of May, the share price began to fall precipitously, breaking through its support level. All investors who wanted a dividend bought up Apple shares before the 6th of May and a selloff followed. Incidentally, of the FAANG sector stocks, only Apple pays dividends. The other companies reinvest their profits in business development. Therefore, there is no cut-off date for them and hence no breakdown of levels on dividends.
Meanwhile, some companies, instead of paying dividends, are buying their own shares off the market and raising the price for investors. It is wise to look for breakout stocks among companies that make regular share buybacks. It is possible to find buyback information in a special calendar on any publicly accessible website.
Market sector and news background
In any economic cycle (recession or recovery), stocks will always perform better or worse than the market. In the market, it is possible for individual market sectors to be rising during an overall downturn and it is easy to find breakout stocks among them. A prime example is 2020 and the COVID-19 pandemic recession. Among the breakout stocks in this case, are “Healthcare” sector stocks.
Let's look at Pfizer shares traded on the NYSE and compare them to the Dow Jones Index (red line) 🔽
It can be seen that in March 2020 the share price correlated quite strongly with the index, however, in April-May 2020 the index went into a flat. At the same time, the share price broke through its resistance level and started rising, i.e. Pfizer stock turned into a breakout stock. The reason was market participants' optimism about a COVID vaccine.
In order to understand which stocks will become breakout stocks during different economic cycles, one must have a little understanding of the economy and the causes that lead to an economic downturn or upturn.
By the way, a downturn or upturn in an economy can be not only global, but also local in its individual sectors. Shares of individual companies rise and fall depending on the beginning of a particular economic cycle for those companies. However, we are not going to dive too deep into this issue.
There is more to come
The definition of stock breakout patterns can be considered a whole science that includes many sections. However, we provide you with a trader's main weapon - useful information 📚
Study the information of the official blog of Olymp Trade and become a professional in trading breakout stocks. Find out more in the second part of our material!
Go to Part 2Risk warning: The contents of this article do not constitute investment advice, and you bear sole responsibility for your trading activity and/or trading results.
