Breakout stock trading is one of the most alluring setups for short-term traders and investors. It allows buying into a stock and earning quick but possibly substantial profits in a short amount of time. But it’s not always rainbows and butterflies; the attractive gains can come with heavy risks.

What is breakout trading?

Breakout trading is a strategy where traders buy into or short a stock when it moves beyond a critical price level or when prices break out of patterns during consolidation. The strategy simply takes a position in anticipation that prices will continue to move in the direction indicated by the breakout. 

However, not all breakouts end up as a profitable trade. This is why experts suggest cutting losses early when there are signs that the trade will not follow through. Always plan your entry and exit conditions before engaging in a breakout trade.

If you want to test the strategy, here are three stocks that have recently broken out of the resistance and consolidation patterns.

MGIC Investment Corporation (MTG)

MGIC Investment Corporation is a casualty and property insurance holdings company offering various financial services like private mortgage insurance, ancillary services, and other credit risk management solutions via its subsidiaries. These services include mortgage default protection, credit enhancement, and loan loss coverage.

The company has been steadily improving its financials as its latest quarter sales ended in positive territory, growing 2.36% QoQ, following several quarters in the red. MGIC Investment also beat analyst earning estimates by 23.64%. Analysts rate MTG as a “Moderate Buy.” with a high target of $21.00, a potential upside of 19.39% for traders and investors.

Is now the time to buy MTG?

MTG broke out of its continuation flag pattern and is currently on its way to testing its previous high. The 14-day RSI has also moved into bullish territory after a healthy correction. Investors looking to buy into MTG can either wait for a retest from its pattern breakout point or look for buying signals in intraday charts.

Manhattan Associates, Inc. (MANH)

Manhattan Associates, Inc. is an IT and consulting company that develops and offers supply chain solutions for various companies globally. MANH's services help its clients manage their inventory, supply chains, and omnichannel operations. These clients include wholesalers, retailers, manufacturers, and other businesses. The company’s products also feature functions that assist with transportation management, distribution management, and coordination of workflows for a holistic supply chain solution.

MANH has consistently performed throughout several quarters, with the latest EPS reporting a 26.00% earnings surprise. Sales also went up by 4.53% QoQ. Analysts are bullish on MANH, giving the company a “Moderate Buy” recommendation with a $230.00 high target, an upside of 9.79%.

Should you buy MANH now?

MANH broke out its resistance and is currently testing the resistance-turned-support area. However, the move was not accompanied by substantial volume, and the 14-day RSI shows signs of a potential momentum waning. Investors can watch and wait for a buying opportunity based on the price’s reaction to its support and possible follow-through and confirmation. Those who want to buy in early should do so with tight stop losses.

AvePoint, Inc. (AVPT)

AvePoint, Inc. is an IT and consulting company that provides companies with optimized information technology operations, digital workspace security, and critical data handling through its cloud-native software platform. The company’s solutions include AvePoint Confidence, which provides software-as-a-service (SaaS), and AvePoint Confidence, which gives its clients a combination of cloud service architecture with modularity to help address operational challenges within the organization. In addition, clients are also given an interconnected suite of functionality, three control, modernization, and resilience suites when they purchase the AvePoint Confidence platform.

AVPT recently unveiled its AvePoint Opus, which will help customers take advantage of AI and assist in the lifecycle management process of its customers. While the company may not be consistently beating estimates, its presence in AI makes it a compelling choice for potential growth. Analysts agree and rate AVPT as a “Strong Buy” with an upside potential of 33.51% based on the $10 high target.

Is this a confirmed breakout?

AVPT broke out of resistance with a substantial volume the day its AvePoint Opus was announced. However, there was no follow-through on the day after the announcement. 14-Day RSI also shows that AVPT is trading near the overbought area, possibly indicating strong momentum. Investors can wait for confirmation before buying into AVPT to ensure that other buyers are following through with their trades. 

Final Thoughts

Trading stocks breaking out or with strong momentum can provide investors with quick profits. However, the strategy comes with its own risk. Investors should at least backtest and have tight stops when trying out these trades and ensure that they set proper expectations of the potential and risk before deploying any capital. Always remember not all trade ideas are equal, and not all potential profits are realized.

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