Breakout & Breakdown

Breakout

A breakout is a stock price moving outside a defined support or resistance level with increased volume. Trading a breakout is when someone enters a long position after the stock price breaks above resistance or enters a short position after the stock breaks below support. 

Below is an example of a breakout. You can notice the chart shows a large increase in volume, associated with an earnings release, as the price breaks through the resistance area. The breakout was so strong that it caused a price gap. The price continued to move higher and didn't retrace to the original breakout point. That is a sign of a very strong breakout. Breakouts with relatively high volume show conviction and interest, and therefore the price is more likely to continue moving in the breakout direction.

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Breakdown

A breakdown is a downward move in a security's price, usually through an identified level of support, that portends further declines. A breakdown commonly occurs on heavy volume and the subsequent move lower tends to be quick in duration and severe in magnitude.

Technical traders can either close out any existing long positions or short sell a security when it breaks below a support level, since that is a clear indication that the bears are in control and that additional selling pressure is likely to follow. A breakdown often signals the start of a downtrend.