Stock Quotes in this Article: NEPT, ZAGG, PRMW, SKUL, HZNP

WINDERMERE, Fla. (Stockpickr) -- Trading stocks that trigger major breakouts can lead to massive profits. Once a stock trends to a new high, or takes out a prior overhead resistance point, then it’s free to find new buyers and momentum players that can ultimately push the stock significantly higher.

A great example of a successful breakout trade that I flagged recently was IsoRay (ISR), which I highlighted in “5 Stocks Under $10 Set to Soar” because the stock was starting to see an increase in upside volume and was holding a key trend line. Also, the stock was trending right near some key resistance levels, which, if taken out,would trigger a major breakout trade.

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Guess what happened? The following day, shares of ISR skyrocketed to a high of $1.47 a share from a daily low of $1.11 a share and off the prior day’s low of near $1.01 a share. That move was also confirmed by heavy upside volume with over 3.2 million shares traded. That’s a ridiculous move of over 40% if you get into the trade the day my article published. Now, the stock ended up giving a lot of gains back the next day after ISR did a stock offering of $3.5 million. Regardless, savvy traders know to book gains off a move that big, so you can see this breakout was a major success.

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.

With that in mind, here’s a look at five stocks that are setting up to break out and trade higher from current levels.

 

Skullcandy

One stock that’s trading very close to triggering a major breakout trade is Skullcandy (SKUL), which develops and distributes headphones and other audio accessories to retailers throughout the U.S. and to distributors in various countries worldwide. This stock is off to a decent start in 2012, with shares up over 18%.

If you take a look at the chart for Skullcandy, you’ll see that this stock pulled back and tagged its 50-day moving average of $13.49 about three times during the last couple of weeks. Each time that SKUL tagged its 50-day, the stock was able to hold that key technical level. Now shares of SKUL have started to move back above its 200-day moving average of $14.54 a share, which is a level the stock has struggled to trend above for the past two months and change. If SKUL can maintain a trend above its 200-day moving average, then the stock will setup to trigger a major near-term breakout trade.

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Market players should now look for long-biased traders in SKUL if it can manage to trigger a breakout above some near-term overhead resistance at $15.02 to $15.40 a share with high volume. Look for a sustained move or close above those levels with volume that hits near or above its three-month average action of 472,135 shares. If we get that move soon, then this stock has the chance for a very explosive move that should send it soaring over its next significant overhead resistance levels at $16.80 to $17.76 a share, or possibly even above $19.75 a share.

One could look to buy shares of SKUL as long as this stock is holding a strong volume trend above its 200-day moving average of $14.54 a share. If you get long above the 200-day, then look to add into strength once SKUL clears $15.02 to $15.40 with high volume. I would use a stop either below yesterday’s low of $14.05 or right below its 50-day moving average of $13.49 a share.

This stock has a major catalyst on the horizon since SKUL is set to report earnings on August 2 after the market close. The current short interest as a percentage of the float for SKUL is gigantic at over 70%. This massive short interest is the perfect storm for a monster short-squeeze in SKUL right into its earnings report, and possible after if the company can deliver strong numbers. This is also a stock with a ridiculously low float of just 15.08 million shares. That low float combined with the huge short interest could easily set off an explosive move if the bulls decide to get long ahead of earnings.

Horizon Pharma

Another stock that could trigger a big breakout trade soon is Horizon Pharma (HZNP), a biopharmaceutical company that develops and commercializes medicines to target unmet therapeutic needs in arthritis, pain and inflammatory diseases. This stock has been ripping to the upside so far in 2012, with shares up over 75% so far.

If you take a look at the chart for Horizon Pharma, you’ll see that this stock has been uptrending strong since breaking out in mid-June above some past overhead resistance at $4.51 to $4.73 a share with monster volume. Since triggering that breakout, shares of HZNP have skyrocketed to its recent high of $8.72 a share. During that uptrend, shares of HZNP have consistently made higher lows and higher highs, which is bullish technical price action. After hitting that high of $8.72 a share, shares of HZNP have pulled back and started to trade sideways between $7.60 and $6.92 a share.

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Market players should now look for long-biased traders in HZNP if this stock can manage to trigger a near-term breakout trade above some overhead resistance at $7.60 a share with high volume. Look for a sustained move or close above $7.60 with volume that’s near or above its three-month average action of 782,749 shares. If we get that action soon, then HZNP will have a great chance of re-testing and possibly taking out its recent high of $8.72 a share.

This company has a major catalyst on the horizon (no pun intended), since it will meet with the FDA on July 26 for the possibly approval of its rheumatoid arthritis drug LODOTRA. The short-sellers are also heavily involved in this stock, since the current short interest as a percentage of the float for HZNP is a whopping 25%. If HZNP can manage to trigger that breakout ahead of July 26, then this stock has the chance of short-squeezing huge into its PDUFA action date.

One can look to buy this stock off any weakness, and simply use a stop right below $6.95 to $6.92 a share. You could also just buy off strength once HZNP clears $7.60 with heavy volume, and simply use a stop below those same levels. Either way, this stock will be in play big-time if it clears $7.60 with volume in the coming days.

Neptune Technologies & BioResources

Another stock in the biotechnology and drugs complex that’s approaching a major breakout trade is Neptune Technologies & BioResources (NEPT), which is engaged in manufacturing and formulation of marine omega-3 phospholipids. Neptune researches, develops, produces and commercializes natural marine products derived from marine biomasses for the nutraceutical, pharmaceutical and cosmetic industries. This stock is off to a strong start in 2012, with shares up over 55% so far.

Recently, Robin Cornwell of Catalyst Research issued a note on this stock to raise his 12-month price target to $9.25 from $8.75 a share. According to Cornwell, “Neptune is unique for a bio/pharma technology company in that the cash flow from the nutraceutical operation is able to cover a substantial portion of the R&D costs of the subsidiary companies.”

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If you look at the chart for Neptune Technologies, you’ll see that this stock has been uptrending extremely strong for the past six months, with shares soaring from a low of $2.46 to a recent high of $5.14 a share. During that uptrend, shares of NEPT have been consistently making higher lows and higher highs, which is bullish technical price action. In fact, just about every time this stock has pulled back during the last month, we’ve seen large volume buyers’ step into the stock. Now shares of NEPT are trending very close to triggering a major near-term breakout trade.

Market players should now look for long-biased trades in NEPT if it can manage to trigger a near-term breakout trade above some overhead resistance levels at $4.88 to $5.14 a share with high volume. Look for a sustained move or close above those levels with volume that’s near or above its three-month average action of 322,440 shares. If we get that move soon, then NEPT could spike to a new 52-week high above $5.14 a share. Some possibly upside targets are $6 to $7 a share if NEPT enters new 52-week-high territory, and sustains that trend.

One could buy NEPT off weakness and simply use a stop below $4.51 or around $4.26 a share. Those levels are key near-term support. You could also use the 50-day moving average of $3.94 a share, if this stock really wants to pullback. One could also just buy off strength once NEPT takes out $4.88 and then $5.14 a share with heavy volume, and simply use a stop just below $4.51 a share.

Zagg

Another stock that’s setting up to trigger a near-term breakout trade is Zagg (ZAGG), which designs, manufactures and distributes protective coverings, audio accessories and power solutions for consumer electronic and hand-held devices under the brand names invisibleSHIELD, ZAGGaudio and ZAGGskins. This stock has been ripping to the upside so far in 2012, with shares up over 55%.

If you look at the chart for Zagg, you’ll notice that this stock has been trending sideways for the last two months, between $9.85 on the downside and $11.70 on the upside. Shares of ZAGG have now just started to push above its 200-day moving average of $10.65 a share, and its taking out its 50-day moving average of $10.81 a share. If ZAGG can manage to hold a trend above those levels, then this stock could setup to spike significantly higher and clear some near-term overhead resistance levels.

Traders should now look for long-biased traders in ZAGG if this stock can manage to hold a trend above its 200-day at $10.65 and its 50-day at $10.81 with strong upside volume flows. I would consider any upside volume day that registers near or above its three-month average volume of 801,389 shares as bullish. If ZAGG can hold that trend, then this stock will have a chance of re-testing and possibly taking out its next major overhead resistance levels at $11.70 to $12.19 a share. This stock could even hit its May high of $13.29 a share in the near-term.

This company has a catalyst on the horizon, since ZAGG will report earnings on August 2nd after the market close. This is a favorite target of the short-sellers, since the current short interest as a percentage of the float for ZAGG is a whopping 33.6%. This stock could start to experience a monster short-squeeze right into its earning date, if it can hold those key moving averages and start to get some strong upside volume flows.

One could be a buyer of ZAGG off any weakness, and simply use a stop right below its 200-day moving average of $10.65 a share. If you get long off weakness, then look to add once ZAGG takes out $11.70 and $12.19 a share with volume. Look for a quick trade to take advantage of any possible short-squeeze right into this company’s earnings report.

Primo Water

My final breakout trade idea today is capital goods player Primo Water (PRMW), a provider of three- and five-gallon purified bottled water and water dispensers sold through retailers. This stock is off to a nasty start so far in 2012, with shares off by over 45%.

If you look at the chart for Primo Water, you’ll see that this stock has been absolutely hammered by the bears from its March high of $3.11 to a recent low of $1.08 a share. During that massive slide lower, shares of PRMW have been consistently making lower highs and lower lows, which is bearish price action. That said, shares of PRMW have started to rebound strong off that $1.08 low with the stock pushing back above its 50-day moving average of $1.32 a share with heavy volume. That push above its 50-day has now moved PRMW within range of triggering a major near-term breakout trade.

Traders should now look for long-biased traders in PRMW if it can manage to trigger a break out above some near-term overhead resistance at $1.72 to $1.73 a share with high volume. Look for a sustained move or close above those levels with volume that hits near or above its three-month average action of 307,579 shares. If we get that move soon, then PRMW could easily explode back to towards its 200-day moving average of $2.63 a share, or possibly even higher.

One could look to buy PRMW off any weakness and simply use a stop right some key near-term support at $1.48 a share. If you buy off weakness, then look at add to PRMW once it takes out $1.72 to $1.73 with volume. You could also just buy off strength once PRMW takes out $1.72 to $1.73 with volume, and simply use the same stop below $1.48 a share. Either trade could also use a stop near its 50-day moving average at $1.32 a share, but that would better suited for buying off weakness.

This stock sports a decent short interest as a percentage of its float of 8%. That could mean that PRMW is setting up for a solid short-covering rally if it breaks out soon, since the bears have some big profits to lock in off that recent fall from $3.11 a share.

To see more breakout candidates, check out the Breakout Stocks of the Week portfolio on Stockpickr.

-- Written by Roberto Pedone in Winderemere, Fla.

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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.