The markets welcomed the New Year on an optimistic note with gains by all the major indexes. A disappointing jobs report on Friday caused some intraday head-scratching but a late day surge allowed all the indexes to close in positive territory. This was a sign that although the job situation is a concern, and some respected economists believe a double dip is still a possibility, the markets believe corporate earnings will rise this year and share prices along with them.

A further sign of a positive mood was a return to mostly above average daily volume. This allowed us to record forty-one confirmed breakouts compared to a weekly average of less than 10 for the last three months. Some of the higher -fliers were Brooks Automation (BRKS) which broke out from a CwH base to rise 19.4% and Pioneer Drilling (PDC) which also broke out from a CwH base to gain 17.6%.

We are starting a series of research articles into the factors that determine a successful breakout over the medium term and begin today with an analysis of our assumptions about volume. See our top tip below.

No new features this week.

Does Breakout Day Volume Affect Later Returns?

This week we start a series of articles on what determines a viable breakout from a cup-with-handle chart pattern. By a viable breakout we mean:

1. More likely than not to provide the opportunity for a gain of at least 25%
2. Low probability of failure (by which we mean low probability of being stopped out using an 8% stop loss).
3. Likely to achieve the profit objective within six months.

We start today by looking at the most fundamental question: what constitutes a breakout?

The first requirement is that a breakout must exceed a target price. For our purposes, the target price is determined by the pivot point of the chart pattern that applies to the stock. We usually refer to it as the breakout price or BoP and for our analysis we are going to require that the BoP be $0.10 above the pivot.

The second requirement is that the stock must close the day above its BoP.

Thirdly, the daily volume must exceed the average volume by some factor. Since we began our site in 2003, we have assumed the necessary factor was 1.5 times the 50 day average volume. This factor comes from the work of William O'Neil who suggested it in "How to Make Money in Stocks". We have never examined that assumption and that's our focus in this article.