Whenever we frequently discuss swing trade breakout setups in this technical stock picking newsletter, we typically refer to base breakouts, which is when the stock or ETF breaks out above a lengthy base of consolidation. However, a secondary type of breakout is called the continuation breakout.

Yesterday's price action in First Trust Dow Jones Internet Index ($FDN) is a clear example of a continuation breakout (short-term consolidation). This is shown on the daily chart of $FDN below:



Although the chart above makes it easy to visually understand the difference between a base breakout and a continuation breakout, let's briefly discuss the main differences between the two types of momentum trade setups.

A base breakout is the first surge higher that occurs after the stock breaks out above resistance of a lengthy base of price consolidation. The length of the base that precedes the initial breakout is usually at least seven weeks in duration (sometimes substantially longer).

After the stock or ETF initially breaks out above the high of the base and rallies higher, a short-term pause of 5 to 15 days (also known as a "correction by time") frequently leads to a second breakout. This pause that precedes the second breakout is the basis for the continuation breakout trade setup. A bull flag chart pattern, for example, is a type of continuation breakout.

On the chart above, notice that $FDN paused for three weeks before moving above the high of the continuation base yesterday. Since yesterday's (February 19) close above the breakout pivot technically triggered a momentum buy signal, we are "officially" buying $FDN in today's session.

Deron Wagner is the Founder and Head Trader of both Morpheus Capital LP, a U.S. hedge fund, and MorpheusTrading.com, a trader education firm.