John Lansing

Buy Berkshire Hathaway Before it Breaks Out

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After closing the largest deal in its history by acquiring railroad company Burlington Northern Santa Fe Corp. (BNI), Warren Buffett's Berkshire Hathaway completed a 50-to-1 stock split of its Class B shares on Jan. 21 to accommodate the deal.

And Tuesday came the announcement that Berkshire Hathaway (BRK.B) would replace BNI on S&P 500 Index (SPX), which will be one of the biggest additions to the benchmark index in years.

Due to its more than $3,400 per share price tag prior to the split, BRK.B had been excluded from the index because it didn't have enough trading volume to meet the index's standards. But the stock split resulted in shares priced in the $70 range, and more than 14 million shares change hands on the day of the split.

So, shares of Warren Buffett Inc. are now affordable for the average investor, but does that mean you want to go out and buy BRK.B now?

Well, if the charts are any indication (and they are), then the answer is an unequivocal yes!

Berkshire Hathaway (BRK.B) About to Take Off

The stock split was the catalyst for an upside breakout in BRK.B from a rectangle pattern.

An upside breakout is a bullish signal that occurs when the price of a financial instrument breaks out through the top of a trading range. This technical event indicates that prices will rise explosively over a period of days or weeks as an almost vertical uptrend appears.

But a lot depends on the duration of the trading range from which the breakout occurred, because this can provide an indication of the strength of the breakout. The longer the duration of the trading range, the more significant the breakout.

For BRK.B it took nearly six months to form, and six months is considered a long enough time for an explosive breakout. And after the stock broke out, it immediately filled the gap and did a back test of the pattern.

BRK.B Daily

See full-size image.

The "narrowness" of the trading range can also be used to gauge the breakout. To determine the narrowness of the trading range, compare the upper boundary with the lower boundary. If the trading range has a small difference between the upper and lower boundary (making it narrow), then the breakout is considered stronger and more reliable. And that is what see have with BRK.B, which you can see on the daily chart above.