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Textbook Breakout in Willamette Valley Vineyards (WVVI)

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Trading stock breakouts is one of the most lucrative strategies for extracting big, fast profits from the market.

The idea behind breakouts is simple.

You see, the stock market is an auction. Period.

It is no different than eBay.

Buyers and sellers are always trying determine the value of securities by voting with bids and offers.

Those who believe a stock is worth more than its current price will buy it until the price exceeds perceive value.

On the other side of the trade, sellers step in when a stock is perceived to be trading at a price above what it’s worth.

Good deal? Buy.

Bad deal? Sell.

Simple as that.

This “invisible hand” of the market, through millions of trades, forms an agreed upon price.

This price will hold and the stock will trade in an accepted range until new information is available.

Things like better-than-expected earnings, an FDA approval for a new drug, or rapid subscriber growth will change what participants believe a stock is worth.

When this happens, a stock goes from “price acceptance” mode to “price discovery.”

Armed with new information, investors now re-enter the auction and re-value the stock.

This is known as price discovery.

Let’s say there is good news, and the market now believes a stock is worth more than it did previously.

Buyers will bid up the price since they see it as a deal at current prices.

Price will rise until sellers believe it has gone too high, at which point they begin selling in greater volume than buyers are buying – sending shares lower and capping the run higher.

This concept of revaluation is crucial for traders.

Because identifying these inflection points where a stock leaves price acceptance and begins a period of price discovery is the best way to get into stocks at the beginning of a breakout move.

Willamette Valley Vineyards (WVVI)

Take Willamette Valley Vineyards (WVVI) for example…

The Turner, Oregon-based wine maker produces wine from grapes from both its own vineyards as well as those purchased from nearby vineyards. Oregon has developed into a premier growing region for wines including pinot noir as well as Rieslings and pinot gris thanks to its climate and terroir (soil and other environmental factors).

And premium wines that have always found an eager market got only more in demand with stay-at-home consumers that wanted or needed to drink better or the best wines possible. Willamette Valley has been in the thick of this great market for great wines.

From August 2020 to January 2021, WVVI stock was in price acceptance mode.

The market agreed shares were worth somewhere between $6.00 and $6.75.

Buyers were active near $6.00, creating support.

Sellers were active near $6.75, forming resistance.

This was the accepted range.

Then, in late January, things changed…

New favorable information about the company caused investors to revalue the stock.

The two key factors included a major surge in revenue for the fourth quarter of 2020 of 15.34%. And major wine-brand companies including Diageo (DEO, Constellation Brands (STZ) and others were reporting surging demand for premium wine and spirit products.

Willamette as an independent began to be recognized for its business and products. And its stock was seen for both its own value or as a potential acquisition by one of the global major producers.

Buyers bought the stock heavily including Jim Bernau the founder and CEO, sending shares through its long-established resistance level near $6.75.

This was the moment WVVI entered the lucrative “price discovery” mode.

This move is almost always accompanied by a surge in volume.

Notice the first big daily surge sent shares right to the $6.75 resistance level, but failed to break through.

Five days later, a subsequent volume surge finally broke through resistance.

This was the trigger to get long WVVI.

Shares advanced 137% over the next three months and continue to climb higher.

Even better, the move happened without the stock moving every moving against you.

Once the $6.75 resistance level was conclusively broken with follow through, shares never again traded below that price.

This is another big advantage of breakout trades.

When executed properly, trades are often profitable immediately without even a penny of drawdown.

WVVI is already up big.

But another stock is setting up in a similar fashion…

Deswell Industries (DSWL)

Deswell Industries (DSWL) is a manufacturer of injection molded components and electronic parts (including circuit boards) and is a $60 million micro-cap currently finding acceptance in the $3.40 – $4.00 range.

The company is scheduled to report earnings any day. And given the general surging demand for component parts including vital electronic circuit boards – the company’s report could show major sales gains.

Should it announce unexpected, very positive news, the market could revalue Deswell in the same way it did Williamette Valley Vineyards.

Look for a strong move above $4.00 accompanied by a large surge in volume.

DSWL sees about 25k shares traded each day, so look for daily volume in excess of 100k shares.

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1 Comment

  1. Jenn
    May 3, 2021 @ 8:21 pm

    Hi there! I’m a new trader and I’d love it if you could devote a future edition to discussing identifying stocks that are entering that price discovery phase you referenced.

    Reply

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