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When New Uptrend Starts, Be On Hunt For Breakouts

Second In A Series When a follow-through day ushers in a new uptrend, investors need to start hunting right away for leading stocks breaking out.

Remember: is not a system for buying market proxies. It's a method for buying stocks of companies with top-notch earnings and and market-dominating products and services. The market is a traffic signal to let you know whether you should be buying stocks or waiting on the sidelines.

Leading stocks can make for much better gains than the market. In a rip-roaring bull market, it's not uncommon to see leaders double in price or even more after breaking out of bases.

Many of the biggest winners will stage breakouts in the first few weeks of the follow-through. Some leaders will even break out on the day of the follow-through.

So be alert for any leaders clearing well-formed chart patterns. The number and the quality of stocks breaking out after a follow-through can tell you about the strength of the market. Breakouts from thin, low-priced, fundamentally weak issues don't point to a healthy market.

Breakouts from chart patterns such as the cup, cup with handles, and are the primary setups investors should look for.

A from a base is a critical juncture for a stock. After weeks or months in consolidation, the stock should emerge in strong price and action.

It's best to see a stock close near its session high and above the base's . You'd want to see solid demand on a breakout. So volume should be at least 40% above average. The higher the turnover, the better.

There are many resources in IBD and online at Investors.com that can point you to leading stocks staging breakouts. Intraday market updates on Investors.com, The Big Picture, IBD 50 and Your Weekly Review are just a few resources.

On Sept. 1, 2010, Chipotle Mexican Grill (CMG) cleared a cup-with-handle base (1) at 154.53, as the Nasdaq staged a follow-through. Volume surged twice its average. At the time, Chipotle sported a 97 , a 96 RS, and an A SMR grade.

Chipotle surged a red-hot 70% before cooling off to test its 10-week moving average. (2)