Breakout Tests

As a finance professor, I often discuss stocks that test their breakout prices. When a stock breaks out to new highs or out of consolidations, it often retraces to test the breakout point before resuming its upward movement. This is typically caused by investors taking profits. However, if the breakout is strong, buyers will come back in and the stock will continue its upward trend. This test can occur the following day or even after a week. Therefore, it is important for those invested in the breakout to keep an eye out for a test. While it may be tempting to ride out a small test, it is crucial to ensure the stock does not fall back within its previous trading range. One indicator of a strong breakout is high volume, which makes it less likely for the stock to fall back. There are two strategies for handling a breakout test: when the stock turns back up on good volume, or when it surpasses its breakout high. The latter is the safer option as it indicates there