Stocks break out when demand outstrips supply. Like a tidal wave, buyers overwhelm sellers at the resistance level, causing them to raise their prices. This causes buyers aggressively buy more shares as fear of missing out (FOMO) kicks in. As prices increase, short sellers start to cover their positions to trim losses, adding more buying pressure. Buyers on the fence when the stock is in a range become more motivated to step in and buy before the prices increase. This sequence repeats as the stock makes higher highs and higher lows.
There are many reasons for demand to soar, driving up buying pressure and causing stocks to break out of range. These reasons tend to general positive sentiment. They can range from earnings beats, guidance raises, analyst upgrades, legal outcomes, Federal Drug Administration (FDA) approvals, positive clinical trials, takeover offers and rumors, product launches and events.
A sector or industry may have exceptional strength as a leader’s stock jumps on some catalyst. This can pull up the rest of the stocks in the particular industry. Traders like to play laggards when a leading stock breaks out.