Scrutinize Those Breakouts

Stocks with good potential to lead during new market uptrends tend to break out of bases, or consolidation areas, in heavy volume. However, upside breakouts in strong volume haven't been a common occurrence lately due to light volume in the market overall. If you've got years of investing experience under your belt, you know the stock market has a habit of sucking investors in, only to spit them out hard in no time. It may or not happen this time around, but risk is still out there, especially in the current low-volume environment. While it's true that a new market uptrend was confirmed on Dec. 20 with big percentage gains on higher volume, meaningful heavy-volume base breakouts remain in short supply. This gives me pause, in addition to the fact that December isn't exactly known for being a launching pad for new market uptrends. The market dished up plenty of nice gainers on Tuesday, but volume was dismal in most cases. Institutional-quality names such as Apple (AAPL), Google (GOOG), Intuitive Surgical (ISRG) and Chipotle Mexican Grill (CMG) all outperformed, but on light volume. The weekly chart of Intuitive Surgical is a good example of what a breakout from a base-on-base pattern looks like. Shares closed Tuesday at $463.47, up $5.81 on the day. The stock recently broke out above $449.06 -- but lack of volume is potentially problematic. Strong buying demand makes for a good foundation for a stock, while recent low-volume gains make its foundation suspect. Intuitive Surgical (ISRG) -- Weekly Source: StockCharts.com View Chart » Apple also recently broke out on light volume, but it's not an example of a base breakout, as with Intuitive Surgical. Instead, Apple broke out above a descending trendline, which often signals a positive shift in trend. Still, the stock still has more overhead supply, or potential selling pressure, to work through as it makes its way toward its 52-week high of $426.70. The bottom line is that Apple is still in the process of building a base. I'd rather wait for a heavy-volume breakout in Apple rather than buy in anticipation of one. Shares closed Tuesday at $406.53, up $3.20. Apple (AAPL) -- Daily Source: StockCharts.com View Chart » The market did serve up two breakouts Tuesday, but both were flawed to some degree. On the surface, Alexion Pharmaceuticals' (ALXN) breakout above $70.42 looked good. Shares rose $2.47 to $71.55, and volume was slightly above average at nearly 1.5 million shares. The stock normally trades about 1.2 million shares a day. However, a quick look at its weekly chart doesn't show much in the way of institutional buying. Alexion Pharmaceuticals (ALXN) -- Weekly Source: StockCharts.com View Chart » Normally, it's good to see some above-average volume weekly price gains, and there are none here. The other area of concern is that the stock has already achieved a big price. Tuesday's move was arguably a breakout from a late-stage base. In similar fashion to other growth names such as Fossil (FOSL) Herbalife (HLF) and Baidu (BIDU), among others, the big money might have been already made in Alexion. Breakouts from late-stage bases can work, but they have a higher failure rate. Finally, Ebix (EBIX) broke out on heavy volume Tuesday, rising $1.18 to $22.45. The company provides on-demand software and e-commerce solutions to the insurance industry. Volume was impressive, coming in at just over 1 million shares -- slightly more than double its average daily trading volume. This hints at least some institutional buying. There was no news to account for the move, but the stock broke out above $21.89, its Nov. 30 intraday high, on a daily chart. A quick look at its weekly chart, though, shows that Ebix is still about 26% from its 52-week high. The shares are still deep inside a much larger base that started in March. When a stock breaks out, the less overhead supply it has to overcome, the better -- too much can make it tough for a stock to make meaningful gains. Ebix could be in this boat, as it's still far off its high. Ebix (EBIX) -- Weekly Source: StockCharts.com View Chart »

Scrutinize Those Breakouts

Some breakouts, like that of Apple lately, cannot be taken at face value -- especially if they lack volume.

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