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5 Breakout Trades on the Radar - 16514 views
WINDERMERE, Fla. (Stockpickr) -- All three major U.S. stock indices rebounded sharply off their lows and turned positive as of midday Friday, after Federal Reserve Chairman Ben Bernanke failed to deliver what many thought would be a continuation of more quantitative easing.
Many market observers had thought that stocks would drop big if Bernanke didn’t hint at any QE3, but this goes to show you why you should never trade off of conventional wisdom. It always pays traders to stay agnostic to prevailing market opinions and simply trade what the market gives you. A better way of putting this is to simply trade what you see in front of you, or trade the action that is present on the tape.
Don’t form any opinion ever in the markets that makes you biased towards one side of the trade. Once you have done this, you will handicap yourself from being able to change with the markets and discover the most profitable trends. Following price trends in the market is what pays, not fighting those trends. So remember, it’s not what you think the market should do, it’s whether you’re on the right side of the trade when the market does what it wants.
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As of most recent check, the Dow Jones Industrial Average was up 155 points to 11,306.22 and the S&P 500 was trading higher by 19.03 points to 1,778.38. The tech-heavy Nasdaq was up over 57 points to 2,477.16. This action is no doubt a surprise to many traders. What’s great about this is that we’re going to see some sweet breakout trades set up as the shorts get caught and squeezed out of their bets.
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 potentially trade higher from current levels.
Research In Motion
One stock that could be setting up for a big breakout is Research In Motion (RIMM). This company is a designer, manufacturer and marketer of wireless solutions for the worldwide mobile communications market. This stock has been a big underperformer so far in 2011 with shares off by over 45%.
If you take a look at the chart for Research In Motion, you’ll see that this stock has been beaten down big during the past few months. Shares of RIMM have fallen from its late April high of $57.32 to its current price of just under $30 a share. That’s a huge drop that has coined money for anyone who has been short shares of RIMM. That said, the stock now looks poised to breakout and potentially head significantly higher.
Market players should keep an eye on shares of Research In Motion here for a breakout trade if you see the stock move above $30.23 on strong volume. A move above that level will put a huge gap down in price into play that happened last time the company reported earnings. That gap down took the stock from over $35 to $25.82 a share. A move in the near-term into that range could see shares of RIMM fill the gap back to $35 a share or possible even higher.
One could be a buyer of this stock once it trades above $30.23 a share on strong volume. I would look for a volume move through that level that registers close to or over 23 million shares, which is the stock’s three-month average volume. I would be a buyer above $30.23 with a stop just a few percentage points below that level.
This isn’t a heavily shorted stock when you look at the percentage of the float that’s sold short by the bears. However, this is a stock filled with negative sentiment so any breakout moves could easily spike this higher. Don’t forget that since shares of RIMM have been beaten down so dramatically, the stock company is now in play for a takeover target.
One high-flying stock that market players should put on their breakout radar is InterDigital (IDCC). This is a holding company, and its various subsidiaries engage in technology research and development activities or in the prosecution, maintenance, enforcement, and licensing of patents. InterDigital provides advanced technologies that enable wireless communications. This is market leading stock with shares up over 65% so far in 2011.
If you take a look at the chart for InterDigital, you’ll see that this stock is quickly approaching a big breakout if it can manage to trade and close above $70.30 to $72 a share. A move above those levels with decent volume could signal a big move is in the cards for IDCC.
It’s also worth pointing out that this stock has yet to breach an uptrend line that’s been in place since July. This shows that large traders have been buying all the dips in the stock.
A move above those breakout levels I mentioned above would also mean that shares of IDCC have busted above a key descending trend line, which would be a bullish trend change. This could mean that the bears have lost control of this stock in the short-term and its setting up to trade back towards $77 a share or possibly even a re-test of $82.50 a share.
I would look to buy this stock if it clears $70.30 to $72.00 on a closing basis with volume. Look for volume that’s close to or greater than its three-month average action of 2.2 million shares. I would add to any long position once it takes out $77 a share with decent volume. Keep in mind that you can also buy this stock on any weakness and anticipate the breakout, just remember that you should use a tight stop no matter what your entry is in case IDCC isn’t ready to go.
This is a heavily shorted stock since over 16% of the float is currently sold short by the bears. It’s worth mention that the short-sellers have been increasing their bets dramatically from the last reporting period by 30.5%, or by about 1.7 million shares. That’s a risky trade to press their shorts on a stock that’s acting so strong. Any near-term breakout could easily spark a big short covering rally.
If you’re looking for a breakout candidate that’s been crushed during the past few months, then Travelzoo (TZOO) is one you definitely need to be putting on your radar. This is a global Internet media company. Travelzoo informs over 22 million subscribers worldwide, as well as millions of Website users, about the best travel, entertainment and local deals available from thousands of companies. This stock is down around 17% so far in 2011, but during the past few months, shares have dropped from a high of over $90 a share to its current price of just over $34.
If you take a look at the chart for Travelzoo, you’ll see that this stock is approaching a breakout if it can manage to trade above $35 to $36.29 a share. A move above those levels with strong volume could set the stock up for a run back towards the mid-$40s or even $50 a share. I like this play since the stock has been beaten down so big that the relative strength index (RSI) is showing a reading of around 30. Oversold readings this low are often places where stocks bounce back from.
One could be a buyer of this stock on any weakness and simply just stop out if it moves below its recent 52-week low of $31.45 a share. If you don’t want to anticipate the breakout, then I would buy once it clears $35 to $36.29 on strong volume. Look for volume that’s close to or greater than its three-month average action of 1.58 million shares. Use a stop just a few percentage points below $35 in case TZOO isn’t ready to run.
This is a heavily shorted stock with over 55.8% of the tradable float sold short by the bears. Those short-sellers have cleaned up shorting this stock over the past few months, so if it breaks out in the near future, then expect the bears to cover their shorts and get long for a quick sharp rally.
If you’re looking for a breakout trade in the computer hardware sector, then take a look at Apple (AAPL). This company designs, manufactures and markets a range of personal computers, mobile communication and media devices, and portable digital music players, and sells a range of related software, services, peripherals, networking solutions, and third-party digital content and applications This stock is off to a decent start so far this year with shares up over 18%.
Shares of Apple are displaying some real strength despite the big news this week that the company’s CEO Steve Jobs resigned and will stay on as chairman of the board. The stock initially dropped around 20 points in after-hours trading on the news, but has since then recovered all of those losses.
If you take a look at the chart for Apple, you’ll see that this popular stock failed to make a lower low following the Jobs news. This is significant because the bears should have been able to knock this stock down with Jobs leaving. Jobs is considered to be a business genius so losing him in an operational capacity should have brought the bears out. For now, the bears are losing the battle since a lower low was never made and the stock only fell below its 50-day moving average for a few sessions.
Now shares of Apple have started to form an even more bullish technical move since the stock has started to breakout above a key descending trend line that started back when the stock hit $404.50 a share. A move above this trend line is bullish because it now means the stock is no longer hitting resistance at a lower high and failing.
One could be a buyer of this stock on any weakness as long as it doesn’t trade back below that key descending trend line. A move back below that level would start at around $375 a share. I would add to any long position if AAPL remains above the trend line once the stock takes out its next significant overhead resistance level at $385 a share on strong volume. Look for volume that’s close to or greater than its three-month average action of 15 million shares. I would target a run back towards its 52-week high of $404.50 if the stock clears $385 with volume.
One final stock that is worth eyeing for a breakout play is SuccessFactors (SFSF). This company provides cloud-based business execution software solutions that enable organizations to bridge the gap between business strategy and results worldwide. This stock has been beaten down pretty bad in 2011 with shares off by close to 25%.
This stock is trading up nicely today by over 6% after an analyst from Piper Jaffray started coverage on the stock with an overweight rating and a $27 price target. I like this upgrade and I like the price target, since a breakout could easily put $27 into play.
If you take a look at the chart for SuccessFactors, you’ll see that this stock has been stuck in a nasty downtrend since May, where the stock was making lower highs and lower lows. During most of that timeframe, the stock was only good for quick trades and never flashed a longer-term buy signal. That said, the stock now looks like it could be setting up for a sharp move higher if the right conditions are met.
Market players should now watch this stock for a breakout trade if it can manage to move above some significant near-term overhead resistance at around $22 a share. A move above this level could easily set this stock up for a run back towards its 50-day moving average of $27 a share (Piper target). I would watch this name for a move over $22 a share on strong volume that’s close to or greater than its three-month average action of 2 million shares. Keep in mind that this stock recently hit a new 52-week low of $19.46 a share, so if that low holds it could be preparing to rip higher.
One could simply be a buyer of this stock once it clears $22 a share on strong volume. You could also be a buyer on any weakness and simply stop out a few percentage points below $22 or just below that 52-week low of $19.46 a share.
This is a heavily shorted stock with over 11.2% of the tradable float sold short by the bears. Those short-sellers have also been increasing their bets from the last reporting period by around 5.9%, or by about 114,000 shares. If you see a breakout over $22 a share soon, then look for the short-sellers to cover their positions and get long for a snapback rally.
To see more breakout candidates like Pandora Media (P), Take-Two Interactive Software (TTWO) and MEMC Electronic Materials (WFR), 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.