What Is a Break?
- A break is a sharp and aggressive price move either higher or lower.
- A break can occur as a gap, or a rapid and large price ascent or descent where trading activity takes place at multiple prices along the way.
- A breakout occurs when the price (or another metric) breaks above resistance or drops below support.
A break is a general term for a sharp price move up or down. A breakout is a more specific technical analysis term referring to when an asset moves above resistance or below support. If a break is large enough, it will trigger safety measures by the exchange to temporarily halt trading for a limited period or the rest of the trading session.
Price changes are usually incremental in orderly markets, moving up and down but not aggressively making large leaps up and down from moment to moment. When an external factor, such as company news or surprise government action, causes a rapid change in investor sentiment, the price is more likely to see an extreme move or a break. For example, if a company issues worse guidance than expected, a $100 stock may move to $95 in seconds, whereas usually, a $5 move could take days or weeks to develop.
Breaks are not necessarily negative as they can occur to the upside as well. They could be the result of an announced merger, an awarded patent, or a sudden breakthrough affecting a specific commodity market.
While breaks can and do occur intraday, the most significant breaks often happen between trading sessions, such as when a geopolitical event arises over the weekend, or a weather event strikes a refinery or mine overnight. Because there is no trading, the supply and demand imbalance builds for a more extended period. When trading resumes, the market will break sharply to reflect a new price based on the new information.
The advent of after- and before-hours trading alleviated some of these pressures, yet the price still moves quickly. If a company releases a negative earnings report after hours, the stock may close at $50 but after the negative earnings report, it could break lower to $40 instantly. This could happen because after the negative news anyone with buy orders near $50 is likely to cancel those orders. This decreases the buying demand for the stock.
On the flip side, people who want to sell will lower the price they are willing to sell at. Any market sell orders will quickly fill any buy orders near $50, and below, dropping the price rapidly as there is little demand to buy or stabilize the price until it drops. At $40, in this case, the price may have dropped enough to warrant some buying interest again, stabilizing the price. Whether the price stays stable will depend on whether supply and demand are in balance. They may not be, and the price may break lower or back higher.
A break may occur as a gap, or the price may move rapidly and aggressively while trading activity is occurring at multiple price levels along the way.
When charting securities, candlestick and open-high-low-close (OHLC) charts are useful tools to see breaks that have already occurred or that are occurring right now. A break lower will be marked by a long bar where the low and/or close are substantially below the prior close. A break higher will be marked by a long bar where the high and/or close is substantially above the prior close.
Traders exploit breaks in several ways. Breaks that occur as a trading range or other chart pattern ends typically kick off new a trend in the direction of the break. This is called a breakout, because the price is breaking above resistance and is expected to continue moving up, or the price is breaking below support and expected to continue dropping.
Breaks that happen during an already steep price accent or decline could signal exhaustion of the recent trend direction. For example, if the price has been rising aggressively, a sharp break higher or lower could signal that the uptrend is about to reverse or has already started. This is sometimes referred to as a blowoff top.
Not all breaks mean the trend is changing. Some occur on news that seems better or worse than it is, causing all gains or losses from the break to reverse quickly. In this case, traders may fade the move by selling into a price jump or buying into a price drop.
The following chart of Netflix Inc. (NFLX) shows multiple breaks. These are sharp price moves higher or lower. A one-period average true range (ATR) is shown at the bottom of the chart, showing how far the price moved each day. For the most part, price moves are contained to less than a $25 daily range, but on occasion, the price has much larger moves.
Four examples are marked on the chart with arrows. In those days, the price saw its largest price range.
On the first arrow, on the left, the stock gapped up by a large amount and then fell throughout the day. In this case, while the bar is red, this was actually an up day where the stock broke higher in the morning, and then gave up some of those gains later in the day. It still closed above the prior close.
The next three arrows all show breaks to the downside, where the stock closes much lower than the prior close. On days such as these, where the price is dropping aggressively, phrases like "This stock is breaking badly" or "Netflix is breaking lower" would be used.
A break is a general term and doesn't have a specific magnitude attached to it. The arrows and ATR are highlighting the biggest breaks in price.