Investor Corner: Look For Strong Volume On A Breakout

Nor is putting your money on a stock that no one else is buying. That's why it's important to check the RSVPs before making your trade.

When a stock breaks out of a base, look around -- make sure other guests have come to the party, and make sure they're big-time players.

On a breakout, the higher the volume the better. Trading should increase at least 50% over the stock's average pace as it makes its pivotal move.

A surge in volume shows major financial institutions, such as mutual funds and pension funds, are putting their faith (i.e. money) into the stock. When these big guns enter, they're the ones who will have the ability to invest millions of dollars and produce the demand capable of lifting the share price.

Trading should increase a large amount also because during a base pattern the number of shares a company trades each day should decrease.

Once initial moves are made to start the handle, big investors will buy small chunks so they can build their position before the stock makes its next big move upward. This next big move, is where you should jump in.

Strong volume is one of the most important elements when you study stocks passing buy points.

A solid breakout can even make up a base with questionable aspects.

Take the Oct. 26 breakout (point 1) of biotech Celgene (NasdaqGS: - ). The 12-week base corrected 20%.

Volume was more than three times its average on the breakout (point 2) -- a clear sign that institutional money moved into the stock. Shares gapped up 12%, crossing a 47.49 buy point.

The stock tried to break out earlier. The false breakout on Oct. 19 (point 3) had only a fraction of what its average daily volume (point 4). In another questionable sign, the stock reversed lower.

Celgene raced 27% higher in less than eight weeks (point 5).

It paused to form another base starting in late December. The biotech broke out from that pattern at 59.34 and made a moderate 13% gain before it started making its most recent base.

When the volume isn't there you could find yourself in a less-favorable spot. Even if thousands of CAN SLIM investors decide to buy a stock on a breakout, they still would need the might of institutional backing for the stock to find success.