Breakouts are typically among the patterns least traded by day traders. The characteristics of a breakout are that the price action will stagnate within a fairly narrow price range until that range is broken out of. Once the price range has been breached, the move away from the area of congestion is often quite dramatic. Breakouts within the trading day usually occur toward the end of the day for securities that have not moved significantly during Phase 2 trading. There can be many reasons for this type of price action, the most common of which is referred to as a short squeeze, which we will now discuss.

It sometimes happens that traders see a security fall during Phase 1 trading. They believe this security is moving lower that day and take a short position but it does not fall any further. At some point in the trading day, most commonly near to market close, those short of the security will start to cover their positions by buying the security. Given that the security has not been falling, this buying starts to push the price up. This buying can also attract new buyers of the stock, which pushes the price up further and brings in the remaining short holders to buy the stock to cover their now losing positions. Although this is quite a neat description of market behavior, it is not a terribly common event. The way to catch these happenings is to set alerts on your market data system that will give off audio and, preferably, visual alerts should a security move out of an area of congestion.