A lot of traders and investors hear the term “Breakout” and wonder what it means. Intuitively, we know it means that the market has broken through some type of upside resistance. To use an analogy, imagine a building with three floors, where the market is on the first floor, attempting to break through the ceiling of the 2nd floor. Once it does actually break through what is the ceiling of the first floor and is now on the 2nd floor, the downside support now becomes the 2nd story floor, and the upside becomes the 2nd story ceiling.
From an Elliott Wave perspective, we look for a i ii 1 2 setup to occur, then the breakout occurs when the top of the 1 is taken out. To better understand, please refer to the attached chart of the S&P 500 Emini futures contract. Off the April 2018 low, it formed diagonal wave (i), with consolidation, or retracement of this move up as a wave (ii) into late June. It then formed another impulsive move up as a purple wave 1 into late July, followed by a shallow purple wave 2 retrace into early August. At this point, it had formed a classic i ii 1 2 setup. Once it takes out the high established by the purple 1, we would consider this a full on breakout, and at no time thereafter would we expect to see it breach the support established by the wave 1 high at 2,850. The next target to the upside is the Fibonacci 1.236 extension at 3,016, and with a few consolidations, the expected target resides at 3,234 to 3,423.
Our Hurst timing models suggest that this current move up will conclude in the first quarter of 2019.
When breakouts like this occur, we strongly encourage our subscribers to purchase shares of breakout stocks. It’s an opportunity to capitalize on the breakout scenario by accumulating profits swiftly, and with very little risk, as the stop out level would quickly become the breakout level itself once the shares show upside follow through. Breakout stocks that we like are NVDA, COUP, SQ, AMGN, PYPL, and LULU – see attached Short Term Momentum Set Ups.
So, if you feel the markets are getting frothy, you’re not far off, but there’s a good bit of meat left on its bone, so don’t lose your core positions – YET! The higher the S&P 500 climbs in the coming months, the less the reward to risk skews for investors, so you’ll want to exit equities in the not too distant future, but not yet.