Breakaway gaps — when a stock gaps up so strongly in price that it rises past a proper buy point — are powerful breakouts. The unusual power signals the stock's upside is likely just beginning.

On March 7, 2018, Medifast (MED) soared over 30%, surging above a 74.78 buy point in a consolidation (1). Shares opened far above the 74.88 buy point and even past the 5% buy range of that entry (2), which went to 78.62. Volume skyrocketed more than 1,100% above average (3), indicating the type of institutional demand that contributes to sustained stock uptrends.

But it's not too late to buy a stock even when it gaps up so much that it totally misses the 5% buy zone. You just have to adjust the buy point. Specifically, use the high price of the first five minutes of the gap-up, which you can find with a five-minute intraday chart in IBD MarketSurge or your brokerage. Buy shares as close as possible to that price and no more than 5% above it.

Other trading rules apply to this adjusted buy point. For example, sell if the stock falls 7% below your purchase price.

Medifast's rally was so strong, it triggered the eight-week hold rule: When a stock runs up 20% or more within three weeks of the breakout in a healthy market, try to hold it for at least eight weeks to see if it can become an outstanding market winner. There is often a correlation between power and distance. The more powerful the breakout, the higher the stock tends to go. Medifast indeed turned out to be a winner, topping out at almost 261 in September 2018.

Breakaway Gaps And Strong Fundamentals

The catalyst in the 2018 move for Medifast was a much better-than-expected earnings and sales report. The provider of weight-loss programs reported quarterly earnings and sales surges of 76% and 25%, respectively, vs. the year-ago period. Earnings growth accelerated for a second straight quarter, from 0% to 8% to 76%. Sales also accelerated, from 6% to 13% to 25%. Accelerating earnings and sales are bullish metrics that can help spark sustained price moves.

Medifast gapped up again three months later, with the company's next earnings report. This was not a breakaway gap, but rather a regular gap-up.

On June 20, the stock advanced as much as 139% past the 74.88 buy point. By then, there were signs that the stock was overheating. The stock climbed more than 100% above the long-term 200-day moving average, a sign that the stock is far extended from any potential support level. According to an internal IBD study done in the mid-1990s, leaders topped once they got on average 111% above their 200-day averages.

The next day, the stock plunged 12.6% in huge volume. This was the largest one-day point loss during the stock's long advance. After a long advance of many weeks or months, this negative action often signals that the stock has topped.

But the stock wasn't done yet. Despite those sell signals, Medifast was able to shrug off those losses and rally for another two-and-a-half months, eventually topping on Sept. 13, 2018, at 260.98, nearly 250% above the 74.78 buy point.

This article was originally published June 4, 2021, and has been updated.

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