Stock Quotes in this Article: AGO, DDD, GST, SODA

MILWAUKEE (Stockpickr) -- When trading, it is important to look for favorable risk/reward setups. In doing so, traders can plan their trades and manage capital more efficiently.

One favorable setup I like to look for when trading is breakouts. This setup is a favorite of mine because the amount of capital being risked is little compared with the possible reward on a strong breakout.

>>5 Rocket Stocks to Buy for May

A breakout occurs when a stock takes out an area of resistance where sellers previous held the stock from moving higher. By breaking out of resistance, a stock can gather momentum as a new round of buyers and traders push the stock higher. After a strong breakout, the broken resistance level then becomes a support level where new buyers come in, holding the stock up.

With this in mind, here are a few stocks near breakout levels.

>>5 Hated Earnings Stocks That Deserve Your Love

SodaStream International


 

As you can tell from the chart, SodaStream International (SODA) has big break potential from a technical perspective. With a short interest of 7.2 million of 41.66% of the float, a break could have shorts covering.

SODA broke through $54 in early April and hit a high of $55.62 before coming back down. Since then, the stock broke the $54 area on Thursday and Friday, but both days failed to close above that level. When looking for an entry, I would look to start an initial position at the $54 level and add on the way up. A comfortable close above $54 and I would likely hold over night and possibly add more. A strong breakout should see volume above the 50-day moving average at 850,000.

I think we can see a quick move up to $57 on a good break and potentially higher if you are willing to hold.

Assured Guaranty


My second breakout candidate to watch is Assured Guaranty (AGO). This stock broke above $21 twice in late March, hitting a high of $21.30. Although it broke $21, which was a resistance area, it failed to close above that level both times. I like an initial entry in this at $21 and adding some at $21.30. Ideally, a strong breakout will have volume over 3 million, as happened earlier this year when AGO had a nice run from $14 up to $20.

Gastar Exploration


My third breakout candidate to watch is Gastar Exploration (GST). As you can see from the chart, this stock has been quite active in April on heavy volume. The stock hit a high of $2.88 earlier in the month and $2.86 last Thursday. A potential entry in this is the $2.88 area as the stock will look to break that and continue its strong uptrend. As noted, volume has been declining lately. A good breakout in GST should have strong volume around or over 1.5 million shares as we saw earlier in the month when the stock had a nice run.

3D Systems


My fourth and final breakout candidate is 3D Systems (DDD). With a short interest of 27.3 million shares or 32% of the float, a breakout in DDD could squeeze some shorts into covering.

From a trading perspective, an initial entry can be done in the lower $35s. However, I don’t think things will get heated up though until $36, another adding point. I think a break above $36 should have it test $36.54 the high set in the month of April and a third possible adding point at or above this level.

Given the short interest in the stock, a monster short squeeze could occur on a strong breakout over $36. If this occurs, $40 or higher is certainly a possibility.

-- Written by Andrew Anger in Milwaukee.

RELATED LINKS:

>>Stocks Are Doomed. Buy More Stocks.
>>4 Big Tech Stocks to Trade (or Not)

>>5 Stocks Under $10 Set to Soar

Follow Stockpickr on Twitter and become a fan on Facebook.


Andrew Anger, based out of Milwaukee, is a proprietary trader, focused on technical analysis in small- to large-cap stocks.  He graduated in 2012 from Saint Mary's University of Minnesota with degrees in marketing and entrepreneurship. You can follow him on twitter @angertrader.