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4 Stocks Setting Up to Break Out - 58119 views
WINDERMERE, Fla. (Stockpickr) -- U.S. stocks have come back under selling pressure today, after the market ripped to the upside on Thursday for a daylong rally following a report that showed a drop in jobless claims.
So far, stocks haven’t been able to carry over Thursday’s big gains due to another big spike in crude oil prices. Brent crude oil jumped by over 1.7% to trade above $104 per barrel, its highest level since September of 2008. Market players continue to be concerned about further unrest in Libya and the potential of a social uprising in Saudi Arabia. There are reports that protesters have planned a nationwide “day of rage” in Saudi Arabia for March 11.
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Recently, the Dow Jones Industrial Average is down by about 130 points and the S&P 500 is off by around 14 points. The tech-heavy Nasdaq has lost about 19 points. If the slide in stocks continues, the Dow Jones is at risk of losing its key psychological level of 12,000 which is only about 100 points away from current levels. The S&P 500 is also only about 15 points away from losing its key psychological level of 1300.
Despite the back-and-forth trading of the U.S. stock market recently, there are still a number of sectors that are acting strong and producing tons of breakout candidates. Those sectors include energy, technology and precious metals. These are the sectors that are producing market leaders and could be the place to be for the rest of the year.
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 from current levels.
One stock that’s starting to break out is New Gold (NGD), an intermediate gold producer with a portfolio of global assets in the U.S., Mexico, Australia, Canada, Chile and Brazil. New Gold primarily focuses on gold, silver and copper deposits. This stock is off to a decent start in 2011 with shares up around 11%. The mid-cap gold player is following the strength in the SPDR Gold Trust Shares (GLD), which has also started to breakout above $139 a share.
If you take a look at the chart for New Gold, you’ll see that the stock has started to form a major breakout chart pattern now that it has started to move above some past overhead resistance at around $10.30 a share. This move is very significant, because New Gold is breaking out on extremely heavy volume. During the past three trading sessions prior to today's, the stock has seen volume of 5.2 million, 4.5 million and 3.5 million shares change hands as the stock closed up each time. That action easily exceeded the three-month average trading volume of 2.8 million shares.
So far on Friday, the stock has already registered 4.85 million shares traded as the stock makes this powerful breakout move. What I love about the action in New Gold right now is that the stock is now printing brand new 52-week highs today off of this breakout. If this breakout holds, NGD will quickly approach its all-time high, which sits at around $12 a share. I can’t stress enough that if New Gold gets about that all-time high, then the sky truly is the limit for this stock. I say this because New Gold will not have any past resistance levels that could potentially hold the stock back from a monster bullish uptrend.
What traders should now watch for with this stock is for the breakout price of $10.30 to hold. As long as the stock doesn’t trade significantly below that price, then I expect the uptrend to continue for a sustained period of time. Also, keep in mind that strong fundamentals are supporting this move in NGD. On Thursday, the company said that results for the fourth-quarter and year-end were the strongest results in the company’s history. New Gold reported an increase in gold production at a much lower cost, which produced a 131% jump in cash from operations during 2010.
Another gold stock that has already started to break out is large-cap player Goldcorp (GG). This company is a gold producer engaged in the operating, exploration, development and acquisition of precious metals properties in Canada, the U.S., Mexico and Central and South America. The company produces and sells gold, silver and copper, and it also holds interest in lead and zinc projects. So far in 2011 this stock is up around 8.5%.
If you take a look at the chart for Goldcorp, you’ll see that the stock has started to break out above some past overhead resistance at around $49 a share. This move in Goldcorp is also coming on very big volume which increases the probability that the stock could trend much higher from current levels. During the last three trading sessions prior to today, volume has come in at 15.8 million, 11.2 million and 8.6 million shares traded. The only time the stock didn’t close up was when 11.2 million shares traded, but even then the stock only closed down by only around 40 cents from its opening price.
Today, the volume has already clocked in at 5.7 million shares as this breakout continues to be produced. The three-month average trading volume is 6.9 million shares, so watch for the stock to close Friday on volume above that level for further confirmation that his breakout has legs. The volume pattern in Goldcorp tells me that large institutional money managers are moving into the stock in a big way. Traders should now watch for this stock to take out its all-time high, which is just above $50 a share. A move above that level would also clear this stock of any past overhead resistance and could mean the stock is setting up to enter a new bullish phase.
Keep in mind that this company also just reported extremely strong fundamental results. On Feb. 25, the company reported fourth-quarter 2010 net earnings of $331.8 million, crushing previous fourth-quarter earnings of $66.7 million in 2009. Adjusted net earnings for the fourth quarter were $417.1 million, or 57 cents per share, vs. $182.7 million, or 25 cents per shares in the fourth quarter of 2009.
Market players should now look to buy this stock on any pullback as long as it doesn’t trade much below the breakout price at around $49 a share.
One final stock that’s already started to break out is cloud computing player Riverbed Technology (RVBD), which provides solutions to the fundamental problems of wide-area distributed computing in the U.S. and internationally. This stock was a market leader last year, and it continues to outperform in 2011 with shares already up by around 24%.
If you take a look at the chart for Riverbed Technology, you’ll that this cloud computing leader has started to print brand new 52-week highs today. What’s even more important though is that Riverbed has started to break out above some past overhead resistance at around $43.50 a share. This move in Riverbed is very significant because it has pushed the stock into all-time-high territory, which means that just about everyone who has bought this stock is making money.
What traders should watch for now with Riverbed is for volume to start expanding as the stock pushes higher. The three-month average trading activity is 4.2 million shares, so watch for volume to come in much higher than that in the next couple of trading sessions.Remember, price always trumps everything else, so don’t fight the trend on Riverbed as long as the stock continues to trend higher.
I will also point out that another market leading cloud computing stock has started to form a breakout chart pattern. Market players should put Aruba Networks (ARUN) on their breakout watchlist. If you check out the chart for ARUN, you’ll see that this stock has stated to break out above some past overhead resistance at around $31.65 a share. Clearly, the cloud computing names are starting to see some big money flow into the space and some of that could be due to takeover chatter.
Takeover or not, I would suggest putting these names on your trading radar and look to buy them on any weakness to play the uptrending cloud computing sector.
Aruba showed up on a recent list of the 10 best-performing stocks of the year.
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.