Stock Quotes in this Article: CBOU, JVA, MRGE, PEET

WINDERMERE, Fla. (Stockpickr) -- U.S. equities are in complete free-fall today, with the Dow Jones Industrial Average down well over 300 points as traders continue to embrace the “risk-off” trade.

Some are citing fears about the global economy as the reason for the market swoon, while others are cautioning that a major default could still be in the cards out of Italy. Italy is deemed to be too big to fail by many market-watchers, so any debt crisis in Rome could cause a Lehman Brothers-type situation in Europe. That’s a fear that could be sparking large European investors to pull money out of U.S. stocks since our markets are more liquid and they need the cash.

No matter what the reason is, the facts are that all three major U.S. indexes have now erased all of their 2011’s gains. The S&P 500 is now off by over 10% since its high hit in late April. At last check, the Dow Jones Industrial Average was down over 330 points at 11,560, and the S&P 500 was trading lower by 38 points 1222. The tech-heavy Nasdaq has plunged over 69 points to 2608.

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    On days like today, when stocks are falling sharply, there’s one strategy that I always employ that has served me very well in the past: I look for stocks that are either trading higher or aren’t falling by anywhere near as much as the overall market. These stocks are displaying relative strength, and that’s a bullish technical sign.

    Some names I am seeing this type of action in today are SolarWinds (SWI), Tetra Tech (TTEK), Air Transport Services Group (ASTG), Lihua International (LIWA), Zillow (Z), Pandora Media (P), Kraft Foods (KFT) and Jazz Pharmaceuticals (JAZZ). The strength in these names could mean that their shares are in such high demand that not even am market crash can take them down.

    No matter what the overall market is doing, there are always stocks that are breaking out and trending higher. The top traders in the world know that markets are made up of thousands of stocks and tons of sectors. With so many moving parts, there’s always some sector or stock that’s acting strong and doing its own thing.

    Here‘s a look at a number of stocks that look poised to break out and potential trade higher from current levels.

    Caribou Coffee

    One stock could be preparing for a big breakout soon is Caribou Coffee (CBOU), which operates coffeehouses primarily in the U.S. It offers premium coffee and espresso-based beverages, as well as specialty teas, baked goods, whole bean coffee, branded merchandise and related products. This stock has become a market leader in 2011 with shares up over 40% and trading near 52-week highs.

    Caribou reported earnings this week -- I featured it earlier in " 6 Earnings Stocks That Could Crush the Shorts." The company raised its 2011 guidance for net sales growth to 11% to 13% from 7% to 9%, and it bumped up its EPS estimates to 39 cents to 41 cents vs. previous estimates of 35 cents to 37 cents.

    If you take a look at the chart for Caribou Coffee, you’ll see that this stock is just starting to signal a major breakout now that the stock has started to move above some past overhead resistance at around $15.09 a share. This isn’t a breakout I would ignore, because it’s coming on massive volume. Volume today has already registered over 1.3 million shares, which is well above the three-month average action of 442,000 shares.

    Volume was also strong coming into today with the last three trading sessions (all up days), at 535,000, 1 million and 1.6 million shares traded. Clearly, we have some solid money flow into this stock, so if the breakout holds, then CBOU could be ready for a large move higher.

    What traders should watch for now is for the stock to close above $15.09 a share. This would mean the breakout price stuck until the market closed, and that would raise the probability that shares of CBOU are going to trend much higher in the coming days or weeks.

    One could be a buyer of this name on any weakness now as long as it remains above $15.09 a share on a closing basis. I would use a mental stop just a few percentage points below your buy entry in case CBOU isn’t ready for the primetime.

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    Coffee Holding

    Another coffee stock that’s setting up for a potential breakout play is Coffee Holding (JVA), an integrated wholesale coffee roaster and dealer in the U.S. Coffee Holding conducts wholesale coffee operations, including manufacturing, roasting, packaging, marketing and distributing roasted and blended coffees for private labeled accounts and its own brands, and it sells green coffee. This stock has been on a monster run so far this year, with shares up over 470%.

    If you take a look at the chart for Coffee Holding, you’ll see that this stock is still trending above its 50-day moving average of $16.34 despite a recent sharp selloff from $30.94 to $18 a share. Now the stock is potentially setting up for a big breakout if JVA can manage to move above some near-term overhead resistance at $23 a share. What I like about this setup is that volume is increasing on the up days as JVA approaches that breakout level, with shares currently trading near $21 a share.

    One could be a buyer of this stock once it clears $23 with big volume, or you could buy it on any weakness and anticipate the breakout with a stop just a few percentage points below your entry. Keep in mind that support for the stock sits at $20 and then $18 a share. I would look for volume that’s well above its three-month average action of 1.2 million shares. I would add to any long position if JVA breaks out above $23 and then takes out $24.58 a share on strong volume.

    It’s worth noting that this stock is a bear's delight. The current short interest as a percentage of the float for JVA is an extremely large 26.1%. The short-sellers have also been increasing their bets from the last reporting period by 9.4%, or by about 69,000 shares. This high short interest could fuel a big short squeeze soon, but also remember that a high short interest can cut the other way on a stock.

    Peet’s Coffee & Tea

    One more coffee play that is trading very near breakout levels is Peet’s Coffee & Tea (PEET), a specialty coffee roaster and marketer of fresh roasted whole bean coffee and tea. The company sells its coffee through multiple channels of distribution, including grocery stores, home delivery, office, restaurant and food service accounts and company-owned and -operated stores in six states. This is another market leading stock with shares up over 40% so far in 2011.

    Peet’s Coffee & Tea reported a strong quarter earlier this week that showed second-quarter that net income rose by 20% due to strong sales that beat Wall Street estimates. The company also raised its forward revenue guidance for this year to 10% to 12% from previous estimates of 8% to10%.

    If you take a look at the chart for Peet’s Coffee & Tea, you’ll see that the stock is trading a few points off some major past overhead resistance at around $62.86 to $62.53 a share. This stock was trading above those levels briefly today, but has since pulled back and is now changing hands at around $60.50 a share. Support for the stock sits at around $58 to $57.40 a share and its 50-day moving average is $56.44 a share.

    If you think PEET has a chance at breaking out soon, then there’s a number of ways you could trade this. The first is to wait until confirmation has been hit and the stock has closed above $62.86 a share on strong volume. Look for volume that’s well above its three-month average action of 173,000 shares. Another way to play this is to buy on any significant weakness with a stop just below one of the support zones I mentioned above.

    This is another favorite stock of the short-sellers. . The current short interest as a percentage of the float for PEET is an extremely large 23.6%. If this stock breaks out anytime soon, then I expect to see a massive short covering rally that beings a run for this name towards $100 a share.

    Another of my earnings short-squeeze plays this week, Pete's also shows up on a list of Jim Cramer's Stocks to Watch.

    Merge Healthcare

    One more stock that’s trading very strong today and breaking out is Merge Healthcare (MRGE), which develops health care information software solutions and delivers related services. This is another emerging market leader, with shares up over 50% so far in 2011.

     

    This company just reported record pro forma sales of $57 million for the second quarter, blowing away its 2010 second-quarter sales of $41.5 million.

    If you take a look at the chart for Merge, you’ll see that it is looking very bullish, with shares breaking out above some past overhead resistance at $5.65 a share. This breakout is noteworthy since its coming on huge upside volume. The volume so far today has clocked in at 1.4 million shares, with the stock up about 5%. That volume is twice the three-month average action of 636,000 shares. Volume on Wednesday (also an up day) was also extremely strong, registering 1.7 million shares. This strong volume move through resistance levels should not be ignored, because it shows that the bulls are in charge of the stock for now.

    One could simply be a buyer of this stock on any weakness and place a mental stop just a few percentage points below your entry point. One mental stop point you could even use is the 50-day moving average at $5.28 a share. This move by Merge is setting the stock up for an even bigger breakout if it can manage to trade above $6.19 a share. I would be a big buyer of this stock if you see it take out $6.19 on big volume, since the stock hasn’t cleared that level in three years.

    To see more breakout candidates, including Zipcar (ZIP), Yamana Gold (AUY) and Nature’s Sunshine (NATR), check out the Breakout Stocks of the Week portfolio on Stockpickr.

    -- Written by Roberto Pedone in Winderemere, Fla.

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    >>5 Technical Setups With Breakout Potential

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    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.