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5 Stocks Poised for Breakouts - 22876 views
WINDERMERE, Fla. (Stockpickr) -- U.S. equities continue to struggle in Friday’s trading session due to the unresolved U.S. debt crisis. Traders are gun-shy ahead of next Tuesday’s deadline for lawmakers to raise the debt ceiling in an attempt to void the country's defaulting its debt for the first time in history.
This market action puts stocks on pace for the sharpest weekly decline in a year. Traders are fearful that a loss of the country's triple-A credit rating could roil credit and bond markets around the world. The Dow Jones Industrial Average has dropped 484 points during its five-day losing streak that started last Friday.
In midday action, the Dow was down about 60 points at 12,182, and the S&P 500 had shed about 5 points to 1296. The tech-heavy Nasdaq was down by about 3 points to 2763.
Instead of focusing on the news, it’s a far better exercise to focus on the charts of the three major U.S. indices. All three are trading very close to or right at their 200-day moving averages, an area at which markets often find buying support as long as the level holds. If we do get a debt deal in the coming days, then the market could see a strong bounce to the upside from here.
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Understand that the markets could blow through the 200-day prices first before a bounce if we do see a debt deal. It's often speculated that market makers will run key technical stops before a big reversal move in the markets, to force retail traders out of their positions.
The bottom line: Be prepared to trade the market around and off of the 200-day moving averages since this is a technical level that large traders watch like hawks. Keeping in mind that the moving averages reset daily, today's levels are 11,978 for the Dow, 1284 for the S&P and 2705 for the Nasdaq.
No matter what the overall market is doing, there are always stocks that are breaking out and trending higher. 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.
Here‘s a look at a number of stocks that look poised to break out and trade higher from current levels.
One stock that’s setting up right now to break out is Deckers Outdoor (DECK), a designer, producer, marketer and brand manager of footwear and accessories, including the Teva and Ugg brands. This stock has been a solid performer so far in 2011, with shares up over 20%.
Despite reporting a second-quarter loss of $7.3 million due to increased spending on 11 new retail stores, this stock is acting very strong today in volatile tape. It looks like the bulls are choosing to focus on Deckers' guidance for full-year earnings to increase by 17%, up from previous guidance of just 13%.
If you take a look at the chart for Deckers, you’ll see that this stock is quickly approaching a major breakout if it can manage to clear $97 to $97.75 a share. A move above those levels would mark all-time highs for the stock, so traders should watch for a breakout here closely since the stock could easily run another 20 points with ease.
One thing that’s worth noting about this move in Deckers is that it’s coming on huge volume. Volume yesterday (up day) was 1.9 million, and volume today has already clocked in at over 2 million shares. Both of these days have registered volume that’s well above the three-month average action of around 1 million shares. It's a bullish sign to see a stock approaching a breakout on such big volume.
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If you’re bullish on this stock, then watch for Deckers to clear $97.75 on heavy volume. One could be a buyer of this name on any weakness in anticipation of that breakout. I would use a few percentage points on my stop in case this stock isn’t ready for the primetime yet. I would add aggressively once it takes out $97.75 on strong volume.
One way to play this is to buy 100-strike call options once you see Deckers take out $97.75 with volume. It’s worth pointing out that the stock is heavily shorted by the bears -- the current short interest as a percentage of the float is a rather large 10.4%. This should help to power this stock much higher if it breaks out since the shorts could easily get spooked with Deckers printing new all-time highs.
Deckers, one of Jim Cramer's FADS CAN stocks, shows up on a recently list of 18 Fundamentally Strong Stocks With Positive Technicals.
Another stock that’s setting up for a potential breakout trade is Molycorp (MCP), which is a rare earth oxide producer in the Western hemisphere and owns a rare earth project outside of China. The company is in development stage. This stock is off to a solid start in 2011, with shares up over 30%.
If you take a look at the chart for Molycorp, you’ll see that this stock has been on a tear for the past couple of weeks. Shares have risen from a recent low of $50.68 to the current price of around $64 a share. Despite that 14-point move, this stock still looks like it wants to trend much higher. Cementing that thesis is the fact that MCP has been acting strong the past few days in a very weak overall tape.
Traders should now watch Molycorp for a breakout trade once the stock clears some big overhead resistance at around $66.13 to $66.43 a share. A move above those levels on strong volume should set the stock up for another big run higher. The volume coming into today has already been tracking in very strong with three of the last five sessions (all up days), which registered 9.8, 10.8 and 9.4 million shares. That volume is significantly higher than Molycorp's three-month average action of 6.1 million shares.
One could be a buyer of this stock once it clears $66.43 with big volume, or you could buy it on any weakness and anticipate the breakout with a stop just a few percentage points below your entry. If Molycorp takes out $66.43, then shares could easily trade back towards its next significant overhead resistance level at $71.43 a share. It’s not out of the realm of possibility that the stock could even trend back toward its 52-week high of $79.16 a share.
This is another heavily shorted stock by the bears. The current short interest as a percentage of the float for Molycorp is an extremely large 19%. This high short interest could spark some big percentage moves if the stock breaks out in the coming days or weeks. Make sure to put this hot name on your radar.
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Heartland Payment Systems
If you’re looking for a breakout play in the business services sector, then check out Heartland Payment Systems (HPY), which provides bankcard payment processing services to merchants in the U.S. and Canada. This is another strong stock, with shares up over 39% so far this year.
Heatland Payment Systems recently reported a strong second-quarter profit that topped Wall Street estimates due to large jump in its small and medium enterprise card processing volumes, while keeping costs under control. Heartland also bumped up its forecast for the year but left its revenue estimates unchanged at 8% to 10%.
If you take a look at the chart for Heartland Payment Systems, you’ll see that this stock is quickly approaching a major breakout if it can manage to trade above some past overhead resistance at around $22.06 to $22.17 a share. Volume was very strong on Thursday, a big up day, with over 1.2 million shares trading vs. the three-month average action of 340,000 shares.
Since that large volume came on their earnings news, this stock could need a bit of pullback or rest before its ready to break out. I only view large breakout volume spikes as bullish if the stock stays above its breakout price points, which for Heartland is $22.17 now.
If you’re bullish on this stock, you could be a buyer on any weakness with a stop just below the 50-day moving average of $19.73 a share. Remember, moving averages on any stock always reset daily, so check the charts frequently so you know what the levels are. If you get long and Heartland holds the 50-day, I would add aggressively once you see $22.17 taken out on strong volume.
One could also just simply wait and buy the breakout on Heartland once it takes out $22.17 a share. Any move above $22.17 should set this stock up for a test of its next significant overhead resistance level at around $27 a share.
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One name in the medical equipment and supplies space that’s starting to break out is RTI Biologics (RTIX), which produces orthopedic and other surgical implants that repair and promote the natural healing of human bone and other human tissues and improve surgical outcomes. This stock might just be starting to heat up this year, with shares already up around 22%.
If you take a look at the chart for RTI Biologics, you’ll see that this stock has been in a very strong uptrend since February, with the stock consistently making higher highs and higher lows. This is a very bullish trend for any stock since it means that large institutional traders are paying up to own shares on any dip, and they’re paying up on the rips as well.
Now this stock has started to break out above some past overhead resistance levels at $3.18 and $3.25 a share. It’s also worth noting that RTIX is acting strong today in a weak tape and breaking out. This demonstrates that the stock is in high demand and traders are unwilling to sell shares even on down market days. This stock has also printed a new 52-week high today, which is another bullish development from a trend standpoint.
One could simply be a buyer of this stock on any weakness and place a mental stop just a few percentage points below your entry point. I would look for a run back towards its next significant past resistance levels at around $4 to $4.50 a share, or possibly even higher.
Goldman Sachs Group
One more breakout play that could also be a great trade if Congress can come to some type of debt-ceiling agreement that the market lies is bank and a financial holding company Goldman Sachs Group (GS). This stock hasn’t done well in 2011, with shares off about 19%, but that could be about to change rapidly.
If you take a look at the chart for Goldman Sachs Group, you’ll see this stock has started to find some buying support right around its 50-day moving average of $134.37 a share. What could be happening here is that traders are starting to take some long positions in Goldman for a trade off a potential debt deal in congress. A debt deal could spark a short-covering rally for Goldman and spike the stock substantially in the coming days.
I would suggest that market players watch for a breakout in Goldman Sachs shares above some past overhead resistance at around $138.95 to $139.25 a share on strong volume. Look for volume that’s close to or above its three-month average action of 6.2 million shares. If that breakout does happen, then Goldman could easily slice through $142.30 (next significant resistance level) and trade back towards $150 to $152 a share, which are much bigger past resistance levels.
Let me be clear that I only think this trade will work if we get a debt deal that the bulls love. The bank stock like Goldman could see the biggest relief rally off any debt deal, so monitor Goldman for this breakout because it could run large.
One way to play this trade is to buy some call options to limit your risk if you see Goldman start trending strong in front of the debt announcement.
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.