A breakout is a sustained move above a resistance level. Breakouts are usually associated with a bullish outlook and might be triggers for sizable moves to the upside. A key factor in the analysis of a breakout is whether it has been confirmed or not.
If a resistance line is penetrated by a significant amount, or the price stays above this line for a prolonged period of time, we can speak of a breakout. The resistance line becomes a support line, i.e. a line off which the price is more likely to bounce than to cross it from above – it is a concept contrary to the one of resistance. The same psychological factors (such as grief and regret) as in the formation of resistance play an important role in this case.
Breakout in Gold
If such a scenario takes place in the gold market, we can speak of a breakout in gold. An example of the above that also shows a situation in which a gold resistance line is becoming a gold support line can be seen in the chart below.
This long-term chart shows a declining resistance line based on the 1996 and 1999 local tops. This line came into play in 2001 and 2002. The decisive confirmation of the breakout came in 2002 – gold moved visibly above the declining blue line and then declined back to it, but not below it. Once this level was cleared, gold really took off. The 2002 breakout could have telegraphed a very important shift in the market that was happening at the time. It was a transition from a long-term bear market to a long-term bull market. This transition, the breakout and its confirmation took a long time to be completed but when it finally came to be, gold was really ready to move well beyond what was expected at the time. And a long-term breakout could have been the tool to pinpoint this change.
Breakout in Silver
The analysis of breakouts can also be applied to silver. An example of a breakout and a silver resistance line becoming a silver support line can be seen in the chart below. This time we look at a narrower time frame to show that breakouts can also work for the short or medium term.
Let’s focus on November-December 2007. Silver moved back and forth in the proximity of the 2007 top. In such an environment, the 2007 high served as resistance. The several failed attempts to move above it suggested that this line was potentially an important resistance, which could result in significant moves. At the very end of 2007 silver moved above this line and confirmed the move (you will find more on confirmations below). This breakout was a bullish development. As it turned out, silver continued its upward move for months, moving from around $15 to around $21. In this specific situation, the analysis of breakouts would have paid off handsomely.
Breakout in Mining Stocks
Another example of a breakdown will encompass mining stocks. It shows that breakouts can also be used to identify counter-trend corrections within a downtrend. Some of them could be tradable.
This is a long-term chart, where the resistance line is based on the 2012, 2014 and 2015 tops. Early 2016 brought a change in that the HUI was able to move above this line, confirm the move and then appreciate some more. Even after all this, the appreciation continued further. So, after a significant confirmation of a breakout, the HUI moved from 175 to above 275, a very sizable move against the overwhelmingly bearish trend.
Verification of a Breakout
In order to consider a violation of a resistance line valid, at least one of the criteria listed below should be met:
- The move above the resistance line should be significant. There is no clear rule telling what constitutes a significant move. Some use 3% as a benchmark in the case of important resistance levels and 1 % for the short-term ones.
- It should be accompanied by high volume
- Price should close above the resistance level for 3 constructive trading days to confirm the breakout.
The idea of resistance is a fundamental one in technical analysis. It can be very useful in making investment decisions as it allows a trader and an investor to predict certain market moves.