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WINDERMERE, Fla. (Stockpickr) -- The Nasdaq and S&P 500 were under some selling pressure Friday after a pair of heavyweight corporate earnings failed to meet Wall Street expectations, despite a trio of strong results from some blue-chip names that kept the Dow index trading to the upside.
IBM (IBM) and Intel (INTC) helped to give the Dow strength a day after IBM issued a bullish earnings outlook, and Intel said it would boost capital spending in 2012. However, weakness at General Electric (GE) and Google (GOOG) put pressure on the on the broader indexes.
At last check, the Dow Jones Industrial Average was trading up 55 points and the S&P 500 was off by 4.3 points. The tech-heavy Nasdaq was sliding lower by 9.8 points.
The top traders in the world know that markets are made up of thousands of stocks in different sectors. With so many moving parts, there’s always some sector or stock that’s acting strong and setting up to breaking out. Once a technical breakout is triggered, it can lead to big buying that will push any stock significantly higher.
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Trading breakouts is not a new game on Wall Street. This strategy has been mastered by legendary traders such as William O’Neal, Stan Weinstein and Nicolas Darvas. These pros know that once a stock starts to break out above past resistance levels and to hold above those breakout prices, then it can easily trend significantly higher.
Here’s a look at a number of stocks that are setting up to break out and potentially trade higher from current levels.
One stock that’s very close to triggering a breakout trade is Changyou.com (CYOU). This is online game developer and operator in the People’s Republic of China. This stock is off to a slow start in 2012 with shares up just a bit over 2%.
If you take a look at the chart for Changyou.com, you’ll notice that this stock has been stuck in a big downtrend for the last six months. During that timeframe, shares of CYOU have grinding lower making mostly lower highs and lower lows, which is bearish price action. That said, now CYOU is starting to find some buying support at around $20.71 to $22.25 a share, and some decent upside volume days are also starting to show up.
Market players should now watch for CYOU to sustain a high-volume move and close back above $23.57 and $24 a share. A high-volume move or close above those levels will trigger a breakout trade. Watch for volume on any future breakout that’s near or above its three-month average volume of 311,918 shares. If we get that action, then look for CYOU to spike big back towards $27 a share, or possibly higher.
Keep in mind that CYOU is scheduled to report earnings on Feb. 6 after the market close. If the breakout I mentioned above hits before their earnings date, then look for this stock to spike nice as we head into their report.
Another stock that’s setting up for a major breakout is Jiayuan.com International (DATE). This company is an online dating platform in China. This stock is off to a hot start in 2012 with shares up over 19% so far.
If you take a look at the chart for Jiayuan.com International, you’ll see that this stock has been absolutely crushed from its August high of $14.87 to its recent low of $5.50 a share. During that huge slide down in the stock, shares of DATE were consistently making lower highs and lower lows on huge volume, which is bearish price action. Now the stock has started to find some buying support at around $5.50 to $5.61 a share, and its setting up to trigger a number of breakouts.
Traders should watch DATE to trigger a breakout trade if this stock can manage to sustain a high-volume move and close back above some near-term overhead resistance at $7.10 and back above its 50-day moving average of $7.14 a share. Look for volume on that move that’s near or above its three-month average action of 118,755 shares. If we get that move soon, then look for DATE to hit $7.78 a share. I would add to any long positions off the breakout once $7.78 is taken out with volume. If $7.78 does get taken out, then look for DATE to run towards $9 to $10 a share.
One stock in the computer services complex that’s nearing a major breakout is Sify Technologies (SIFY). This company is an integrated Internet, network and electronic commerce services companies in India, offering end-to-end solutions with a range of services delivered over a common Internet backbone infrastructure. This stock is ripping big so far in 2012 with shares already up over 20%.
If you look at the chart for Sify Technologies, you’ll notice that this stock has been uptrending since it hit a near-term bottom at $3.70 in mid-December. Since hitting that bottom, the stock has been spiking higher on solid volume back above its 50-day and 200-day moving averages. That’s bullish price action, and now shares of SIFY are setting up to trigger a big breakout trade.
Market players should SIFY for a breakout trade if this stock can manage to clear some near-term overhead resistance levels at $5.08 to $5.39 on heavy volume. A sustained high-volume move or close above those levels should set this stock up to trend back towards its next significant overhead resistance level at $6.45 a share, or potentially much higher. Look for volume on the breakout that registers near or well above its three-month average action of 852,390 share.
Another stock in the computer services complex that’s nearing a big breakout is Rediff.com India (REDF). This company, along with its subsidiaries, is engaged in the business of providing online Internet-based services, focusing on India and the global Indian community. This is another stock that’s off to blazing start in 2012 with shares up over 17% so far.
If you look at the chart for Rediff.com India, you’ll notice this stock has found some big buying support in the past few months at around $7.11 to $7.37 a share. After that buying interest swept in, shares of RED started to uptrend, and it’s now challenging a move back above its 200-day moving average of $9.06 a share. If that level can get taken out along with some near-term overhead resistance, then REDF could easily breakout and spike significantly higher.
Market players should now watch REDF for a sustained high-volume move and close above $9.06 and $9.25 a share. Look for a volume that’s near or above its three-month average action of 460,685 shares. If we get that action, then I would look for REDF to re-test $10.50 to $11.20 a share, or possibly much higher.
Keep in mind that REDF will report earnings on January 25 before the market opens. Regardless of that upcoming news event, I would still look to play this breakout for a trade going into next week. This stock could easily spike up towards $11.20 before their numbers are released.
One final stock that’s quickly nearing a big breakout trade is OxiGene (OXGN). This is a clinical-stage, biopharmaceutical company that’s developing therapeutics to treat cancer and eye diseases. This stock has traded up slightly so far in 2012 with shares up over 5%.
If you look at the chart for OxiGene, you’ll notice this stock was drilled after it printed $1.97 in early November, falling to a recent low of $0.89 a share. After hitting that near-term low, this stock has started to trade sideways between $0.97 and $1.37 a share. A move to the upside outside if that sideways trading pattern should break this stock out and potentially set it up for a sharp spike higher.
Market players should watch OXGN for a high-volume move and close back above some near-term overhead resistance at $1.16 and then above $1.37 a share. Watch for volume to track in close to or well above its three-month average action of 475,874 shares. At last check, volume has already hit over 700,000 shares, so market players should now watch for OXGN to close above its 50-day moving average of $1.03.
If we get that action, then OXGN has a good chance to break out next week and spike higher once $1.16 is taken out with volume. A sustained high-volume move or close over $1.16 should set this stock up to re-test $1.37 to $1.97 a share. That $1.97 level could easily get hit once $1.37 is taken out with heavy volume, so keep this name on your trading radar for next week.
-- Written by Roberto Pedone in Winderemere, Fla.
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.