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3 Stocks Poised for Breakouts - 23848 views
WINDERMERE, Fla. (Stockpickr) -- U.S. stocks are rallying big for the second day in row off news of a ceasefire in Libya and due to a joint currency intervention by a number of G-7 industrialized nations.
The Bank of Japan, Germany’s Bundesbank, the Bank of England, the Italian Central Bank and the Bank of France have all jumped into the currency markets to sell yen against the dollar and euro. The yen had hit a historic high of close to 76 against the U.S. dollar this week. This move is being done to stop the yen from rising, which complicates Japan’s efforts to deal with the destruction caused by last week’s devastating earthquake and the unfolding nuclear crisis. The last time the G-7 did a coordinated currency intervention similar to this move was over a decade ago.
The stability of the yen is very important for Japan since many Japanese companies rely on exports and a lower yen is vital for these businesses to weather the recovery from the earthquake and tsunami. The coordinated intervention is also helpful because it opens the door for the BOJ to intervene on its own, without having to worry about being criticized for starting a currency war in the future.
Dow Jones Industrial Average is higher by 102 points to 11,876 while the S&P 500 is up by 8 points to 1,282. The tech-heavy Nasdaq has risen 17 points to 2,653.
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The massive rebuilding effort that’s set to take place in Japan has started to move the materials and energy sectors. The thesis here is pretty simple: As Japan moves out of the cleanup phase and into the rebuild phase, it's going to need materials such as wood, steel, silver and copper. You can’t rebuild anything without using energy. Japan is going to create huge demand for energy assets like oil, coal and natural gas. This will surly eat up global supply and potentially push up prices.
The materials and energy sectors of the market are where I am finding new breakout stock candidates. 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 stocks, including some material and energy stocks that look poised to break out and trade significantly higher from current levels.
One energy player that’s already starting to break out is Peabody Energy (BTU), which through its subsidiaries engages in the exploration, mining and production of coal worldwide. This stock is off to a decent start in 2011, with shares up around 11.6%.
If you take a look at the chart for Peabody Energy, you’ll see what I will label as a “picture perfect” chart for anyone who’s bullish on the coal sector. Since October of last year, this stock has been making higher highs and higher lows, a chart pattern I love to see in any long candidate because it shows that there’s a ton of demand for the stock when it dips and that large traders are willing to pay up when the stock trades higher. Simply, this means there’s huge demand for this equity.
That’s not the only thing that looks bullish about Peabody Energy. The stock has now started to break out above some past overhead resistance at around $71 a share. This bullish move is also coming on huge upside volume that bodes well for higher prices. During the last three trading sessions (all up days), volume has been well above the three-month average trading activity of 4.5 million shares. Volume of 15.9 million shares traded on Wednesday, 8.5 million on Thursday and already today 6.8 million.
If you like to trade breakouts, then this is exactly what you want to see: big volume coming into the stock as it takes out a key resistance level. So where can Peabody trade to now if this breakout doesn’t end up failing? The next major resistance level won’t come into play until this stock hits $84 a share. That’s a good amount of upside from current levels, so this stock could still be a great buy right here as long you manage the risk and cut your losses if it stops working.
One last thing I will add about Peabody. This company is one of the largest coal players in the world with a market cap of $19.47 billion. The stock is not expensive, trading at a forward price-to-earnings of 11.66. It's hard for me to come up with a case where these guys don’t blow away their next quarter as demand for coal from Japan skyrockets. This stock could uptrend for quite awhile -- not just to $84 a share -- if this breakout holds.
A materials stock that looks ripe to rip significantly higher and break out is Headwaters (HW), which provides products, technologies and services in the building products, construction materials and energy industries. This stock is off to a solid start in 2011, with shares up around 24%. Those gains so far this year might look like small potatoes if demand from Japan truly booms.
If you take a look at the chart for Headwaters, you’ll see that this small-cap materials player -- it has a $348 million market cap -- is starting to break out above some past overhead resistance at around $5.60 to $5.70 a share. This is a significant breakout, because the stock has failed four times in the past when it traded up to this level and subsequently sold off. What I absolutely love about this breakout in Headwaters is that it’s coming on huge volume.
With the stock currently trading at around $5.74 a share today, volume has already clocked in at more than 1.1 million shares. This is about twice the three-month average volume of around 513,000 shares. This is exactly what you want to see when any stock breaks out: huge volume flowing into the name as it makes its move. So how high can this stock trade from here if this breakout holds? My first target zone is going to be the 52-week high of $6.31 to $6.84, which is another overhead resistance price. If Headwaters clears those areas, then it would put $8 to $8.34 in play, which are the next two major overhead resistance levels.
The bottom line is that this stock has a ton of upside if it continues to uptrend and take out overhead resistance levels. Hopefully, highlighting it now will get people in early as the stock starts to break out.
I would also like to point out that Headwaters recently had some decent insider buying. Donald P. Newman, the CFO of the company, just bought 25,000 shares, or $128,000 worth of stock, at an average price of $5.14 on March 11. It never hurts to see an uptrending stock where the insiders are still buying.
Alpha Natural Resources
One more energy name that looks poised to breakout is Alpha Natural Resources (ANR), a supplier and exporter of metallurgical coal for use in the steel-making process, and a supplier of thermal coal to electric utilities and manufacturing industries. This stock has been a laggard in 2011, with shares off by around 7.7%, but that might not last much longer as Japan enters the rebuild phase.
If you take a look at the chart for Alpha Natural Resources, you’ll see that this coal player looks ready to make two major technical moves that could signal the stock wants to move substantially higher. The first is that shares look ready to trade above the 50-day moving average of $56.17 a share. Just this move alone should bring in momentum traders who love to see stocks trade above this key moving average. Second, shares of Alpha Natural Resources look ready to break out above some past overhead resistance at around $57 to $58.39 a share.
If this stock can trade above those near-term resistance levels, then it should set up ANR to trade significantly higher since there’s really no more resistance until it hits the 52-week high at $68.05. What traders should watch for now is for volume to start increasing if the stock breaks out. Any spikes higher in the stock that come on volume above the three-month average daily activity of 6.1 million shares should be viewed as constructive.
This has to be the last stock in the market I would want to be short as Japan starts its rebuilding efforts. Unfortunately, a large number of market bears happen to be short this name right now. As of Feb. 28, the short interest as a percentage of the float for ANR is a rather large 15.5%. This high short interest could be what causes ANR to short squeeze big back to $68.05 if not even higher in a very short timeframe.
To see more breakout candidates, check out the Breakout Stocks of the Week portfolio on Stockpickr.
-- Written by Roberto Pedone in Winderemere, Fla.
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.