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WINDERMERE, Fla. (Stockpickr) -- U.S. stocks are dropping sharply today after government data showed that the tepid U.S. economy failed to create any new jobs in August, leaving the unemployment rate unchanged at 9.1%. Many market players now fear that another recession could be in the cards since this was the worst jobs report in 11 months. It was also the first time since 1945 that the U.S. government reported a monthly net job change of zero.
As of most recent check, the Dow Jones Industrial Average was off by 241 points at 11,252.33 and the S&P 500 was trading down by 29 points to 1,175.40. The tech-heavy Nasdaq was trending down by 65 points lower to 2,480.87.
I personally love days like today because stocks that have relative strength stick out in the weak tape. If investors aren’t willing to sell a stock off on a downtrend day like today, then those names could have strong bids underneath them. Reading the tape like this can often get you into stocks early before they trend significantly higher.
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Some names that aren’t going down today include the following: Acme Packet (APKT), Universal Display (PANL), Great Basin Gold (GBG), MAKO Surgical (MAKO), SodaStream (SODA) and Molycorp (MCP). These are names that warrant a deeper look since an almost 200-point down day on the Dow is failing to bring out sellers in these stocks.
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. Trading breakouts is not a new game on Wall Street. This strategy has been by legendary traders such as William O’Neal, Stan Weinstein and Nicolas Darvas.
Here ‘s a look at a number of stocks that look poised to break out and potential trade higher from current levels.
One stock that could be setting up for a big breakout is Gramercy Capital (GKK). This is an integrated commercial real estate finance and property investment company. This stock is off to a very solid start in 2011 with shares up over 35%. The stock is also acting strong today in a weak tape with shares up over 10% on heavy volume.
If you take a look at the chart for Gramercy Capital, you’ll see that this stock has been trending higher during the month of August as shares have traded above both its 50-day and 200-day moving averages, which is bullish. Just today, the stock has spiked up over 10% through its 200-day moving average of $3.16 on monster volume. Volume so far on Friday has registered over 1.1 million shares which is well above its three-month average volume of 325,000 shares.
Much of that move was due to the news that Gramercy agreed to settle $549.7 million in mortgage debt by transferring hundreds of U.S. buildings to lenders. One analyst at Real Capital told Bloomberg in telephone interview that Gramercy might be an attractive acquisition target for buyers of discounted financial assets and someone looking to buy a public real estate platform.
Market players should keep an eye on shares of Gramercy for a breakout trade if the stock can close above some significant overhead resistance at $3.21 a share. A move above that level will could easily set this stock up for a sharp move back towards $4.50 or even higher than $5 a share. The reason I think this one could move huge if it can sustain a trend over $3.21 is because there’s not a whole lot of overhead resistance until $4.50.
One could be a buyer of this stock once it trades above $3.21 a share on strong volume. The volume today is very encouraging, so watch for this exact type of action to follow through into next week. If you get into this name above $3.21, then I would use a mental stop at around $3 in case this stock isn’t ready to rip higher. Watch for any move above $3.21 where volume is tracking in close to or above 1.1 million shares.
iShares Silver Trust
Another potential breakout trade could be setting up nicely for the iShares Silver Trust ETF (SLV). This is a grantor trust that is designed to provide a vehicle for investors to own interests in silver. The purpose of the trust is to own silver transferred to the trust in exchange for shares. This ETF is still up over 35% this year despite a massive drop a few months ago.
If you take a look at the chart for iShares Silver Trust, you’ll see that this ETF has been making higher lows and higher highs since it hit a near-term bottom in June at $32.50 a share. Whenever a stock is showing a pattern like this, it can mean that large traders are buying any dip and paying up to have exposure to the stock. The SLV is now quickly approaching a big breakout if it can manage to trade above some near-term overhead resistance at around $42.78 a share.
A move above that level could mean that the SLV is setting up for a big run back toward its recent high of 48.35 a share. If the bears can’t hold it back here on any test of that breakout level, then the SLV could squeeze the bears who’re short this ETF. The shorts could easily get persuaded to cover some bearish bets if the SLV sees a volume move through $42.78 a share.
I would look to buy the SLV if it clears $42.78 on strong volume that tracks in close to or well above its three-month average action of 36.8 million shares. Another great way to play an SLV breakout is to buy some call options on the ProShares Ultra Silver (AGQ) since this trading vehicle moves twice the daily perfume of silver. That trade is more risky but will have a bigger reward if the silver breaks out here. Either way, make sure you manage your trades with tight stops in case any future breakout in silver is a false move.
Another silver play that looks poised to breakout is Mag Silver (MVG). This is an exploration-stage company. Mag Silver is engaged in the acquisition, exploration and development of district scale projects located in the Mexican Silver Belt. This stock is off to a slow start in 2011 with shares off by around 9%.
If you take a look at the chart for Mag Silver, you’ll see that this silver play recently ran up from $9 a share to its current price of just over $11 a share in just a couple of weeks. During this move, the stock saw a number of up days that registered volume close to or above its three-month average action of 128,000 shares. This could mean that large traders are starting to accumulate shares here, and they bought into this name as it crossed above both its 50-day and 200-day moving averages.
Now market players should watch for a breakout trade if shares of MVG can manage to trade above some big overhead resistance at around $11.96 a share. This stock was well on its way to testing that level today after it hit a daily high of $11.67 a share. Since then, it has pulled back close to $11.20 a share.
One could be a buyer of this stock on any weakness and anticipate the breakout with a mental stop just below its 200-day moving average of $10.90 a share. If you don’t want to anticipate the breakout, then I would buy once it clears $11.96 on big volume. Look for volume that’s tracking close to or greater than its three-month average action of 128,300 shares. If we see that signal, then I think this stock could make a quick run back towards $14 a share or possibly even higher.
If you’re looking for a breakout trade in the biotechnology complex, then take a look at Jazz Pharmaceutical (JAZZ). This is a specialty pharmaceutical company focused on the identification, development and commercialization of pharmaceutical product. Jazz markets two products: Xyrem, which is a product approved by the FDA, for the treatment of both cataplexy and excessive daytime sleepiness in patients with narcolepsy, and Luvox CR for the treatment of obsessive compulsive disorder. This stock has been a market leader this year with shares up over 110%.
If you take a look at the chart for Jazz Pharmaceutical, you’ll see that this stock has been in a beautiful uptrend since it formed a perfect triple bottom chart pattern back in mid-May and early June. Since that triple bottom, the stock has been making mostly higher lows and higher highs, which is bullish. The stock is now setting up for a major breakout if it can manage to trade above some near-term overhead resistance at around $44.05 a share. At last check, this stock hit a high today of $43.21 a share, but it has since turned back from that level and sold off to below $42 a share.
What I like about this potential breakout in JAZZ is that volume during the past month has been expanding dramatically on the up days. A number of recent up days has registered volume close to or well above its three-month average action of 809,000 shares. This could mean that large trades are positioning themselves for a big breakout in JAZZ soon.
One could be a buyer of this stock on any big weakness in anticipation of the breakout. I would simply use a stop near or a few percentage points below its 50-day moving average of $37.02 a share. If you don’t want to buy on weakness, then get long on any move above $44.05 a share that comes with strong volume. You could also buy some call options on a move above that level since the stock could spike big if the breakout is the real deal.
This stock has a decent short interest with 7.3% of the tradable float sold short by the bears. Any future breakout could easily spark the bears to cover their short bets and push this stock sharply higher. Keep this name on your radar in the coming days and weeks.
One final breakout idea that’s also in the biotechnology sector is Vertex Pharmaceutical (VRTX). This company is engaged in the business of discovering, developing and commercializing small molecule drugs for the treatment of diseases. Vertex engaged in phase-I clinical trials and/or nonclinical activities with respect to a range of additional drug candidates, including compounds intended for the treatment of hepatitis C virus infection, cystic fibrosis and influenza. This stock has been uptrending nicely so far this year with shares up over 28%.
A couple of reasons to like Vertex here is because the stock is displaying some relative strength with shares up most of the day in this weak tape, and also because of an upcoming catalyst that could propel shares higher. Vertex is slated to present at an upcoming Robert W. Baird Health Care Conference in New York that will take place on Sept. 7 and 8.
If you take a look at the chart for Vertex, you’ll see that this stock has two major breakout signals that could be setting up to trigger in the coming days or weeks. The first is a move above a key descending trend line that started back in early August when the stock was at $53 a share. A move above that trend line would be a bullish development for shares of VRTX since it’s marked a level where sellers have showed up recently.
The second breakout signal will trigger if VRTX trades above some near-term overhead resistance at $47.50 and then above its 50-day moving average of $47.92 a share. If the stock clears both of those levels, then it will have a pretty resistance free clear path back towards $53 a share.
One could simply be a buyer of this stock on any weakness as long as it holds above its near-term support zone at around $44.50 to $43.30 a share. I would get out of this trade if the stock falls below those levels on strong volume. If you want to buy strength, then buy VRTX once it clears its 50-day moving average of $47.92 on big volume. Look for volume that’s tracking close to or well above its three-month average volume of 2.17 million shares. I would stop out of that trade if the stock then moves back below that key descending trend line. I would add to any long position in VRTX if it clears $53 with volume.
This stock has a decent short interest since 4.1% of the tradable float is sold short by the bears. Those short-sellers have also been increasing their bets from the last reporting period by around 11.8%, or by about 898,000 shares. If this stock breaks out soon, then the bears could cover quickly sparking a big short-covering rally.
-- 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.