Why I Bought this Stock: A Darvas Box Breakout in Action

by Darrin Donnelly on February 3, 2011

Click on stock chart to enlarge.

Click on stock chart to enlarge.

On Monday, GPOR gave us a picture-perfect Darvas Box breakout.  This is a stock we have been watching for quite some time as it formed a sound base and we patiently waited for a proper breakout.

Fundamentally, GPOR has everything we’re looking for in a Darvas stock.  It’s seen tremendous earnings and sales growth in each of the last three quarters and projections for the coming year are also extremely high. 

When hunting for Darvas stocks, we also want to make sure we’re sticking with top-performing industries.   GPOR is a member of one of the market’s hottest industries right now: energy.  In fact, I think the energy industry is poised to be a leading group throughout 2011.

From a technical standpoint, we’ve patiently watched GPOR build a great-looking Darvas Box over the past eight weeks.  This long Darvas Box is also referred to as a simple Flat Base pattern.

On Monday, our patience paid off as GPOR blasted through its buy point of $23.10 on very heavy volume. 

The much heavier than normal volume tells us there is conviction behind this breakout.  It tells us institutional investors and big-money funds are likely fueling the surge higher.

Another excellent technical signal on the day of the breakout was the fact that GPOR closed near its high of the day.  When stocks break out and then immediately pull back, it can be a sign of uncertainty among buyers; this did not happen with GPOR.

Since the breakout, GPOR has followed through nicely and added to its gains.  This type of follow-though behavior is another sign of a market champion.

Considering all these factors, GPOR has given us a nearly perfect Darvas Box breakout.

However, perfect or not, we still want to protect ourselves if sentiment changes.  No matter how good a stock looks on the breakout, we always want to set a stop-loss that keeps our losses small if the trade abruptly turns against us.

When a stock breaks out of a Darvas Box, or another type of sound base, the best place to set an initial stop is at the intraday low set on the day of the breakout.  (This method is explained more thoroughly in this article.)

In the case of GPOR, our initial stop is $21.39.

You can access the full list of Darvas stocks that are currently setting up bases – with EXACT buy points and sell points – in the latest issue of Darvas Trader PRO by clicking here.

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