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5 Stocks Poised to Break Out - views
WINDERMERE, Fla. (Stockpickr) -- U.S. stocks are under mild selling pressure today, following a sharp spike higher in the previous session as new more negative sentiment continues to flow out of the troubled euro zone.
At last check, the Dow Jones Industrial Average was trading down 37 points, and the S&P 500 was off by 2 points. The tech-heavy Nasdaq was bucking the weakness and treading up slightly by 3.9 points.
One of the major reasons for the selling pressure today is due to the euro, which fell to a 16-month low against the dollar, dropping below $1.27, after ratings agency Fitch urged the ECB to step up buying of euro zone debt to prevent a “cataclysmic” collapse of the euro.
Despite the continued negative news flow out of Europe, many U.S. stocks are bucking the market weakness and trending higher. Some examples of strength in today’s session are Google (GOOG), Human Genome Sciences (HGSI), Transcept Pharmaceuticals (TSPT), Diamond Foods (DMND) and Sears Holdings (SHLD).
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 breaking out. Whenever a stock breaks out, it can be an early technical signal of a much larger move to come.
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 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 trade higher from current levels.
One stock that’s already started to trigger a breakout is Caterpillar (CAT), a manufacturer of construction and mining equipment, diesel and natural gas engines, industrial gas turbines and diesel-electric locomotives. This stock is off to a strong start in 2012, with shares up over 10%.
If you take a look at the chart for Caterpillar, you’ll notice that this stock found some big buying support during the last two months at around $86 a share. In fact, the stock put in a double bottom near that level and has since then rallied sharply to its current price of just under $100 a share. That rally has now pushed Caterpillar into breakout territory. The stock has taken out some major overhead resistance at $97.95 to $98.20 a share, which stood as a wall for this stock for almost two months, making this move impressive if it can hold.
Market players should now watch for CAT to sustain a move and close above $97.95 to $98.20 a share. As long as this stock can continue to trend and close above those levels, then it should stay on course for much higher prices in the near future. The upside volume for CAT ahead of this recent breakout was tracking in very strong, so watch for that pattern to continue. If the breakout does hold, then look for CAT to potentially re-test its 52-week high of $116.55 a share.
One could be a buyer of CAT off any weakness as long as those breakout levels mentioned above hold. I would simply use a mental stop that’s a few percentage points below $98.20 in case this move fails. If the breakout levels do hold, then look for volume on the up days to track in near or above its three-month average action of 8.5 million shares.
Caterpillar, which has a B+ buy rating from TheStreet Ratings, shows up on a list of the 10 Best Dow Dividend Stocks for 2012, along with Johnson & Johnson (JNJ) and 3M (MMM), and was also recently featured in "5 Big Stocks to Trade for Gains."
Green Mountain Coffee Roasters
Another stock that’s already entering breakout territory is Green Mountain Coffee Roasters (GMCR), which is engaged in the specialty coffee and coffee maker businesses. This is another stock off to a hot start in 2012, with shares up over 7% so far.
If you take a look at the chart for Green Mountain Coffee Roasters, you’ll see a picture of a stock that’s been utterly destroyed by the short-sellers. This stock was trading as high as $115.98 in September, and it is now changing hands at just over $48 a share. What’s constructive about the price action in GMCR here is that it has found some big buying support at $41 to $43 a share in the past few weeks. The upside volume has also started to track in very strong in the last two trading sessions, with volume registering well above its three-month average action of 8.8 million shares.
Traders should now watch GMCR for a sustained high-volume move and close above some near-term overhead resistance at $47.31 and then above its 50-day moving average of $51.80 a share to trigger a big breakout trade. A high-volume move and close above those levels should set this stock up for a monster rebound. Some potential upside targets could easily take GMCR to $60 a share or higher. This is heavily shorted stock with over 22% of the tradable float sold short by the bears, so the potential for a massive rebound is high of the buyers continue to step into the stock here.
You could be a buyer of this stock off any weakness as long as it continues to trend above $45 a share or above the breakout level of $47.31 a share. If you get long, I would then add aggressively to any move over the 50-day with volume. Look for volume that’s tracking in near or well above 8.8 million shares. I would simply use a mental stop a few percentage points below $45 in case GMCR isn’t ready to rip higher soon.
A stock that’s nearing a big breakout is medical device company NuVasive (NUVA), which has a D+ sell rating from TheStreet Ratings. The stock hasn’t done much so far in 2012 -- shares are up just 1.6%. That performance could heat up quickly, though, if the stock can manage to take out some near-term overhead resistance levels soon.
NuVasive was hit with some very bullish fundamental news today after the company said it expects to report 2011 revenue of about $540 million, which is near the top end of its previous guidance.
If you look at the chart for NuVasive, you’ll see that this stock has been stuck in a bearish downtrend for months that has taken shares from a September high of $24.42 to a recent low of $11.02 a share. During that downtrend, the stock has consistently made lower highs and lower lows, which is extremely bearish price action. That said, the stock has started to find some big buying support at $11.02 and $11.25 and it is now challenging a breakout that could change the trend from bearish to bullish.
Market players should now watch NUVA for a sustained high-volume move and close above $13.04 and then its 50-day moving average of $13.17 a share. Look for volume on a move above those levels that’s near or well above its three-month average action of 821,290 shares. If we get that action soon, then look for this stock to challenge its next significant overhead resistance levels at $14.66 to $15.30 a share, or possibly trend much higher.
At last check, shares of NUVA are trading up 4% at $12.80, and volume has already registered over 510,000 shares. One could be a buyer of this stock off any weakness and simply anticipate the breakout. I would simply use a mental stop near today’s lows or even down to $11 a share if you want to give it more room. I would add to any long positions once NUVA takes out $13.17 with volume.
A major player in the banking complex that’s starting to break out today is global diversified financial services holding company Citigroup (C). This stock is off to a great start in 2012, with shares up over 17%.
If you look at the chart for Citigroup, you’ll notice that this stock hit a recent low of $21.40 in October, and since then it has been trending higher to its current price of near $31 a share. During that uptrend, shares of Citigroup have been making higher lows, which is technically bullish action. Now this stock is starting to breakout above some near-term overhead resistance at $30.14 a share.
Market players should now watch Citigroup for a sustained high-volume move and close above $30.14 to signal that this stock wants to trend much higher. Look for volume at today’s close that registers close to or well above its three-month average action of 56.6 million shares. If we get that action, then look for C to re-test $31.55 a share and then potentially trend back towards its 200-day moving average of $34.10 in the near future. The trend in C is so strong right now that I doubt $31.55 will act as much resistance as the stock makes a move back towards the 200-day.
If you’re bullish on C, then look to be a buyer off any weakness as long as the breakout level of $30.14 holds. I would increase my bullish bias on C if the volume at today’s close is anywhere near 56.6 million and the stock closes near its daily highs. I would simply use a mental stop if you get long that’s a few percentage points below $30.14.
Citigroup, which has a C- hold rating from TheStreet Ratings, shows up on recent lists of 19 S&P 500 Laggards That Could Be Leaders in 2012, along with First Solar (FSLR), and 3 Top Financial Stock Picks for 2012 From Barclays.
One more stock that’s rapidly approaching a major breakout is MagicJack VocalTec (CALL), a provider of carrier-class voice over Internet protocol and convergence solutions for fixed and wireless communication service providers. This stock is off to a decent start in 2012, with shares up over 2.7%. That performance could get significantly better if CALL manage to trigger a big breakout soon.
If you look at the chart for MagicJack, you’ll notice this stock is rapidly approaching a major breakout if it can manage to sustain a high-volume move and close above some near-term overhead resistance levels at $14.20 to $14.25 a share. What I like about this potential breakout is that volume on Tuesday (an up day) registered 501,500 shares, which is well above its three-month average of just 178,759 shares. High volume like that as a stock approaches a big breakout is often times a very bullish technical sign.
Market players should watch CALL for a sustained high-volume move and close over $14.20 to $14.25 in the coming days or weeks. Look for volume to track in close to or well above its three-month average action of 178,759 shares if that breakout hits. If we get that high-volume breakout, then this stock could spike big back towards its next significant overhead resistance levels at $16.60 to $20 a share.
You could anticipate the breakout for CALL and buy some shares off any weakness with a mental stop just below some near-term support at $13 a share. You could also buy off strength and get long on a high-volume move and close over $14.25 a share. I would use a mental stop a few percentage points below that breakout level in case it doesn’t hold, or the stock fails to follow through if you buy off strength.
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.