Multi Year breakouts. These are the hidden gems of the markets. These are usually the stocks that give a profitable entry after breaking out from a long non-bullish trend. These are one of my favorite categories of stocks to trade and I am always on the lookout for these stocks.

Let us deep dive into the concept of multiyear breakouts in today’s newsletter. We will learn their formation, how to participate in them, understand how to spot them and finally get creative and build a trade system around these stocks.

Multiyear breakouts: It’s in the name.

Multiyear breakout stocks are part of a bigger bullish trend. The formation goes as follows:

1. A long-term bullish trend (the stock’s primary trend) reaches its peak, thus forming it’s All Time High price

2. The stock enters into a consolidation or a downtrend (stock’s secondary trend).

3. If the stock enters a downtrend, it will rise again to form a “U” shape.

When the price is around near the All-Time High price, the price can form another “U” pattern to form a cup and handle pattern. So, there are 3 broad formations for a multiyear breakout: Consolidation, Cup, or Cup and Handle.

But, when we talk about multiyear, how many years qualifies as multiyear? Ideally, if we are looking for a long-term bullish trend, the secondary trend must form for at least 2 years. If the duration of the formation was for more than 2 years, better the breakout could be.

Because these charts show multiyear price formation, I prefer to use monthly timeframe on candlestick charts or 1% box size on PnF charts.

Participating in Multiyear breakouts with objectivity

Participating in Multiyear breakouts is a function of your trading style as a trader and the comfort level with risk. Objectively speaking, there are two ways to participate in multiyear breakout stocks.

1. Upon breakout: When the price breaks out from the consolidation or breaches the All Time High, the first candle after the breach can be the entry point with low of the candle as stop loss. If PnF charts are used, the first Double Top Buy can be used as an entry point. But there is a high chance that the breakout could be false, and the stop loss can be hit.

2. Wait for Confirmation: The other way to participate in these stocks is that the price must confirm the breakout. To confirm the breakout, the price should form a Market structure low or Bear Trap (if we are using PnF) pattern near the breakout levels subsequently.

I always prefer the latter option because when the price forms a Market structure low or Bear trap pattern, it is not only a strong confirmation but rather an effective entry point as well.

Observe the chart below of AEGISLOG. The price peaked in June 2021 and started the secondary trend. The price revisited the ATH in 2023 and declined again and revisited the high in Feb 2024 to complete a handle. After the breakout in Feb 2024, the price formed a Bear trap near the Breakout levels and resumed the bullish trend.

The chart below of CUMMINSIND shows that the price entered into a secondary trend after peaking in Aug 2015. The price revisited the ATH in Nov 2022 and formed a buildup near ATH. Observe the trend of the stock subsequently.

Let’s get creative: Building trade setup

Spotting these stocks require hard work. I say this because these stocks must be manually screened. I spend a few hours every week to manually check the charts and find opportunities. I then group the stocks and keep an eye on them and check them every week. I also look at the Relative strength of the stock during breakout. This is a really good tool to gauge the strength of the breakout.

A trade set up is made up of the following things: A trading universe, An entry and exit rule, and the trading edge. The trading universe can be any of the indices formed by the NSE or BSE. An entry rule could be a pattern after breakout. A simple exit could be the price going below the moving average of the participation chart. Trading edge is built by analyzing the Relative strength of the company.

I have discussed this concept further in detail in my course ‘How to Trade P&F’ as part of TNT One.