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3 Stocks Headed for Breakouts - 58128 views
The U.S. stock market continues to show resilience in the face of numerous headwinds, with all of the major indices having broken out to new yearly highs. The market continues to climb a wall of worry and all of the pullbacks, thus far, are being brought by the fearless bulls.
The breakouts on the Dow, S&P 500 and Nasdaq are extremely important because the prior 2010 highs had been major resistance for some time. Some of these levels have not been breached in over two years, so market players need to pay very close attention to how the market behaves now that all of the indices are breaking out.
The next key resistance level on the S&P 500 will come in at around 1300, on the Dow around 11,700 to 12,000, and on the Nasdaq near 2700 to 2800. The way the market is acting right now, barring any major selloff, these areas should be reached easily within the next six to 12 months, if not even sooner. Apparently, the market loves all of the cheap money that is flooding the exchanges via quantitative easing.
For market players, fighting this trend is a losing proposition. That's why it's so important to watch for breakouts in any stock or key index so that you can make sure you’re on the right side of the trend. Placing your trades with the market trend rather than fighting the trend and betting against it is the path of least resistance to making money.
Trading breakouts is not a new game on Wall Street. This strategy has been pioneered by legendary traders such as William O’Neal, Stan Weinstein and Nicolas Darvas.
A breakout occurs when a stock makes a move through a significant level of support or resistance, which is usually followed by heavy volume and increased volatility. Wall Street players love to see an upside breakout because it demonstrates strength in the underlying asset as the price breaks above a level of previous resistance. An upside breakout can also take a stock to new highs, which will generate a lot of interest as the stock shows up on sophisticated software that scans for this type of action.
Here's a look at a number of solid breakout stock candidates that could have big upside potential.
One big stock that is nearing a potential breakout is Apple (AAPL), which designs, manufactures and markets a range of personal computers, mobile communication and media devices, and portable digital music players, and sells a range of related software, services, peripherals, networking solutions and third-party digital content and applications.
Year-to-date, Apple has been a big winner, with the stock up more than 51% and not showing signs of slowing down.
If you take a look at this chart, you’ll see that shares of Apple are approaching an important breakout level at around $319 to $320 a share. The last time the stock traded this high was right before the company reported its third-quarter earnings. After that report, shares of Apple sold off all the way down to around $300 a share, but if you look at the chart, you’ll see that the minor weakness just brought the stock back to its trendline support. The bulls quickly capitalized on the selloff and have now bid the stock back up towards the yearly and all-time highs.
Market players should now watch for Apple to clear $320 on a closing basis on solid volume that is either near or above the three-month average trading volume of 18 million shares. If that plays out, my take is that Apple will continue to run higher right into the ever-important Christmas shopping season. It would not be out of the question for this market leader to print $350 a share or even higher in the coming weeks.
Keep in mind that institutional money managers are under a lot of pressure to chase performance here into year-end to capture their bonuses and keep clients invested in their funds. This should keep a floor under the stock and help to squeeze any of the shorts who are still stubbornly betting against Apple.
I would also like to point out that the moving average convergence/divergence (MACD) looks ready to flash a bullish crossover signal that should bode well for higher prices in Apple.
The only way I would get worried about Apple is if the stock broke below $300 and broke below the uptrend line I have drawn in on the chart. As long as the stock remains above those two trading levels, then look for higher prices into year-end.
Another stock that’s already starting to break out above a key resistance level is Lululemon Athletica (LULU), a designer and retailer of technical athletic apparel primarily in North America. Its yoga-inspired apparel is marketed under the Lululemon Athletica brand name.
If you’ve owned this stock so far year-to-date, you’re a pretty happy camper, with the shares up more than 65%.
If you take a look at the chart, you’ll see that shares of Lululemon Athletica are starting to break out above some previous overhead resistance at around $48.45 a share. The best part about this breakout is that it’s coming on extremely heavy volume. As I write this, volume for today is already tracking above the three-month average daily volume of 1.076 million shares, with the stock up 3%. I would also like to point out that the stock traded a whopping 2.8 million shares on last Friday as the stock moved up 3 points.
This is very bullish action in Lululemon, and if the stock can manage to close above $48.45 today, I would definitely not want to be short this stock going into year-end. The next key area of resistance for this stock sits at around $50 a share. If Lululemon can trade above that price point, I would look for the stock to make a run at challenging its all-time high at $60.70 a share.
It’s also worth noting that more than 20% of the tradable float of 45 million shares on Lululemon is sold short by the bears as of Oct.15. In addition, the bears have increased their short potions from the last reporting period on Sept. 30 by over 433,000 shares. This low float and high short interest in the stock could spark a big short squeeze if Lululemon can continue to hold its breakout and trend higher.
One more breakout candidate you should put on your watch list is NetEase.com (NTES), an Internet technology company engaged in the development of applications, services and other technologies for the Internet in China. This stock isn’t a gigantic winner year-to-date, but it has done reasonably well, trading up over 14%.
If you take a look at the chart, you’ll see that shares of NetEase.com are approaching a near-term breakout at around $43.44 a share. Right now the stock is ripping higher by about 5% on heavy volume of about 1.5 million shares, vs. the three-month average daily volume of 898,765 shares. This is very bullish volume and price action, with the stock now within earshot of that key $43.44 level.
It looks like market players are jumping into NetEase.com before the company reports earnings on Nov. 17. If the company can deliver a strong result and if Wall Street likes what NetEase has to say about guidance, then the stock should continue to trend higher and set up to challenge its all-time high of around $48.50 a share.
Keep in mind that the overall market is trading a bit lower today, so NetEase.com is displaying strong relative strength, with the stock trending higher by a decent percentage. This action bodes very well for NetEase's chances at a sustainable breakout that should produce much higher prices in the near future.
Market players are now going to want to watch for the stock to close above $43.44. That, combined with the strong volume that we’re witnessing today, will produce another bullish signal.
To see more breakout action in stocks, check out the Breakout Stocks of the Week portfolio on Stockpickr
At the time of publication, author had no positions in stocks mentioned.
Roberto Pedone, based out of Windermere, Fla., is an independent trader who focuses on stocks, options, futures, commodities and currencies. He is also an outside contributor to Beconequity.com and maintains the website Maddmoney.net, which he sold to Blue Wave Advisors in 2008. Roberto studied International Business at The Milwaukee School of Engineering, and he spent a year overseas studying business in Lubeck, Germany.