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4 Stocks Poised for Breakouts - 64239 views
WINDERMERE, Fla. (Stockpickr) -- Despite a market that's trading relatively flat today -- with no major movement either to the upside or downside -- all three of the broad market averages are still trading above or near their breakout levels.
This is a very good sign to see if you’re bullish on the U.S. stock market. It means that some of the previous overhead resistance levels on the Dow Jones Industrial Average, the S&P 500 and the Nasdaq have finally been taken out to the upside. These overhead resistance levels had marked tough resistance levels for months and were areas that the bears were able to take control of the market. However, now the bulls have taken that control back and are firmly in the driver’s seat. This could mean that the bears are going to be forced to cover their shorts or risk exposure to much higher prices.
Market players should now watch to see if all three of the major U.S. broad market averages can stay above these key breakout levels. The levels to watch are 11,451 on the Dow, 1227 on the S&P 500 and around 2593 on the Nasdaq. Currently, the S&P 500 and the Nasdaq are trading notably above their breakout levels, but the Dow is trading right near its key breakout level. Investors are going want to see all there indexes continue to close above their breakout prices. The longer we stay above these important levels the farther the market can run higher.
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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 stock that looks like it’s setting up to form a major breakout is MGM Resorts International (MGM), which through its subsidiaries owns and operates casino resorts in the U.S. MGM Resorts offers gaming, hotel, dining, entertainment, retail and other resort amenities. This stock has put in a solid year in 2010, with shares up nicely by around 52%.
If you take a look at the chart I have provided for MGM, you’ll see that the stock has now managed to breakout above some major overhead resistance at $14 a share. This overhead resistance level at $14 is very significant because the stock has failed three times in the last three months at this area. This is why traders should watch MGM very closely here, because if it does finally manage to move above that level, it will mark a significant breakout.
What would make this breakout even more significant is if it could happen on bullish volume patterns. I would suggest looking for a breakout above $14 on volume that comes in at over 35 million shares, which is the three-month average daily volume. Big volume would increase the probability that a breakout in MGM has some lasting power. If the breakout does happen, I expect MGM to trade up towards its next significant overhead resistance level at around $16.50 a share.
It’s worth noting that MGM Resorts currently has a very high short interest. The short interest as a percentage of the float on this stock stands at a huge 25.3%. If the stock does break out, you can bet this gigantic short interest will be the rocket fuel the bulls need to power this stock much higher. Just put yourself in the shoes of the bears for a moment. Would you want to be short a stock that finally breaks above some major overhead resistance? I sure wouldn’t, and I doubt many of them will want to stick around if MGM takes off.
MGM makes up 2.16% of John Paulson's portfolio as of the most recent reporting period.
Market players should also put Wynn Resorts (WYNN) on their breakout radar. Wynn Resorts is a competitor to MGM Resorts, and the stock is approaching a major breakout at around $107 to $109 a share. With shares of Wynn currently changing hands at around $106, those levels are not very far away and could be breached to the upside this week. Look for volume on a potential breakout that clocks in above the three-month average trading action of 3.1 million shares.
Keep in mind that if Wynn takes out those overhead resistance levels then the next area of major resistance won’t come into play until the stock hits around $116 to $120 a share. That’s pretty decent upside from here with the stock trading around $106.
Wynn shows up in the portfolio of David Winters at Wintergreen Advisors, as of the most recent reporting period. Recently, it was included in a list of the 10 best-performing S&P 500 stocks of 2010, along with Cummins (CMI) and Akamai (AKAM).
Another stock that market players should put on their breakout radar is Taser International (TASR), which is engaged in the development, manufacture and sale of advanced electronic control devices designed for use in the law enforcement, military, corrections, private security and personal defense markets. This stock hasn’t been a big winner in 2010, with shares up only 11.9%, but those poor returns could be about to change.
If you take a look at the chart for Taser, you’ll see that shares have already broken above some previous overhead resistance at around $4.60 a share. Now the stock is starting to take out another major overhead resistance level at around 4.90 a share. What I love about this action is that both breakouts are coming on huge volume. The three-month average daily volume on Taser is around 480,000 shares, but during the last two weeks, we’ve seen up day volume that has been as high as 3.2 million shares, and just last Friday we had 1.3 million shares.
Some of that high volume was spurred by the news that Taser received five significant follow-on orders on Dec. 8. I always find it bullish on any stock when company receives positive news and the volume confirms that the market liked the news. Now market players should watch to see if the volume and price on Taser can continue to trend higher. The next area of major resistance on the stock will come in at around $5.17 a share. If it can take that level out, then I think Taser could set up to trade as high as $6 to $8 a share. These are both achievable targets since the stock has already traded that high this year.
Keep in mind that around 8.9% of the tradable float of 59 million shares is currently sold short on Taser. This is a reasonably high short interest on a low float stock that could spark a massive short squeeze if shares can continue to trend higher. It’s also worth noting that if Taser can trade above $5 a share, it will immediately become more attractive to institutional money managers. Many large money managers have rigid rules that keep them from investing in stocks under $5 a share, so a move above $5 could bring in new money to Taser.
One more stock that is already starting to form a major breakout is Cliffs Natural Resources (CLF), an international mining and natural resources company that produces iron ore pellets, lump and fines iron ore and metallurgical coal. This stock has been a major market leader in 2010, with shares up a whopping 69%.
If you take a look at the chart for Cliffs Natural Resources, you’ll see that this stock has been in a very powerful uptrend, with shares making higher lows and higher highs since July. This demonstrates that large money managers are buying this stock anytime it dips and that demand is extremely strong for the shares.
What’s even more bullish about Cliffs Natural Resources is that the stock is starting to trade into breakout territory now that the shares of moved above some previous overhead resistance at around $75 to $76 a share. Market players should now watch for the stock to close today above those price points on volume that comes in above the three-month average trading action of 3.7 million shares. With the stock up around 3% right now at $78 a share on volume of 2.6 million shares, that high-volume breakout I like to see could happen today or in the next couple of trading sessions.
Even if we don’t get that high volume today, as long as the stock stays above those breakout prices, then we can still look for big volume to move in sometime in the near future. If you’re bullish on this stock, what you really care about is that the stock stays above the breakout point and doesn’t get hit with any high-volume selloffs in the near future. It’s also worth noting that Cliffs Natural has hit a brand new 52-week high today, which should help to bring in fresh momentum money off the sidelines.
If the trend higher continues and the breakout levels hold on this stock, then my take is that a run towards $100 a share could easily be in the cards in the next couple of months. Keep in mind that this stock has traded as high as $120 a share, so a run towards $100 which is only around 22 points away isn’t that far of a stretch. This stock is definitely worth putting on your trading radar if you like to play major breakouts.
-- 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.