Stock Quotes in this Article: ARQL, BPI, OREX, PTN, GEVO

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.

An example of a recent successful breakout trade is biotechnology and drugs player Chelsea Therapeutics (CHTP), which I featured in Oct. 19's “5 Stocks Ready to Break Out.” The stock was in a clear sideways trading pattern, and it was finding buying interest each time it pulled back near its 50-day moving average. Shares of CHTP were starting to trend higher, and it was quickly moving within range of triggering a near-term breakout trade. That upside volume for CHTP was also starting to expand noticeably, which was another bullish technical sign.

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Guess what happened? Within just a few days, CHTP went on to trigger that breakout trade with monster upside volume. The stock has skyrocketed in just a few days from a low of $1.25 to now over $1.90 a share. That’s a gigantic gain in a very short time frame for anyone who was lucky enough to take the trade.

This is the power of breakout trading. When hit with volume, a stock will often make explosive moves. Shares of CHTP might still not be done going higher, since it could tag its next near-term overhead resistance levels at $1.99 to $2.11 a share, or possibly even $2.32 a share.

Breakout candidates are something that I tweet about on a daily basis. I frequently tweet out high-probability setups, breakout plays and stocks that are acting technically bullish. These are the stocks that often go on to make monster moves to the upside. What’s great about breakout trading is that you focus on trend, price and volume. You don’t have to concern yourself with anything else. The charts do all the talking.

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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.

ArQule

One stock that’s trading within range of triggering a major breakout trade is ArQule (ARQL), a clinical-stage biotechnology company engaged in the research and development of innovative cancer therapeutics. This stock has been hammered by the bear so far in 2012, with shares off by over 50%.

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If you take a look at the chart for ArQule, you’ll notice that this stock recently gapped down big from around $5 to a low of $1.98 a share with monster downside volume. Following that plunge, shares of ARQL have spiked higher and started to trend sideways between $2.92 and $2.45 a share A move outside of that sideways trading pattern to the upside could spark a major breakout trade for ARQL.

Traders should now look for long-biased trades in ARQL once it manages to break out above some near-term overhead resistance levels at $2.92 a share with high volume. Look for a sustained move or close above $2.92 a share with volume that hits near or above its three-month average action of 1,146,930 shares. If that breakout triggers soon, then ARQL will set up to re-fill some of that gap down zone. Some possible upside targets are $4 to $4.50 a share, and possibly even $5 to $5.75 a share.

Traders can look to buy ARQL off any weakness to anticipate that breakout and simply use a stop that sits right below some near-term support at $2.45 a share. One could also buy ARQL off strength once it takes out $2.92 with volume and then simply use a stop a few percentage points below that level.

Gevo

Another stock that’s setting up to hit a near-term breakout trade is Gevo (GEVO), a renewable chemicals and advanced biofuels company focused on the development and commercialization of alternatives to petroleum-based products. This stock has been destroyed by the bears so far in 2012, with shares down a whopping 65%.

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If you take a look at the chart for Gevo, you’ll notice that this stock gapped down back in late September from around $3.50 to a low of $1.77 a share with monster downside volume. Following that plunge, shares of GEVO have started to tick higher and enter a sideways trading pattern between $1.80 and $2.20 a share. That move is quickly pushing GEVO within range of breaking out above the high-end of its sideways chart pattern.

Market players should now look for long-biased trades in GEVO once it manages to take out some near-term overhead resistance levels $2.13 to $2.25 a share with high volume. Look for a sustained move or close above those levels with volume that registers close to or above its three-month average action of 564,063 shares. If that breakout triggers soon, then GEVO will setup to re-test or possibly take out its next significant overhead resistance levels at $2.60 to $2.80 a share. Any high-volume move above its 50-day at $2.80 will then give GEVO a great chance to tap $3.25 to $4 a share.

One can look to buy GEVO off any weakness to anticipate that breakout and simply use a stop that sits right below some near-term support at $1.80 a share. One could also buy off strength once GEVO takes out those breakout levels with volume and then use a stop just below $2 to $1.95 a share. I would add to either position once GEVO clears $2.60 to $2.80 a share with heavy volume.

Palatin Technologies

Another biotech stock that’s moving within range of triggering a major breakout trade is Palatin Technologies (PTN), which is engaged in the development of peptide, peptide mimetic and small molecule agonist compounds with a focus on melanocortin and natriuretic peptide receptor systems. This stock has been on fire so far in 2012, with shares up sharply by over 70%.

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If you look at the chart for Palatin Technologies, you’ll notice that this stock has been trending sideways for the last month and a half, with shares moving between 55 cents on the downside and 80 cents on the upside. Shares of PTN have now started to bounce right off its 50-day moving average of 66 cents, and it’s quickly moving within range of triggering a major breakout trade above some near-term overhead resistance levels.

Market players should now look for long-biased trades in PTN if it can manage to break out above some near-term overhead resistance at 75 to 80 cents per 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 53,589 shares. If that breakout triggers soon, then PTN could make an explosive move back toward its July high of $1.20 a share.

One can look to buy PTN off any weakness to anticipate that breakout and then simply use a stop that sits just below its 200-day moving average at 65 cents per share. Traders can also buy off strength once PTN triggers that breakout above 75 to 80 per share with high volume and then simply use a stop a few percentage points below 75 cents or down by its 50-day at 66 cents per share.

Orexigen Therapeutics

Yet another stock in the biotechnology and drugs complex that’s trading within range of triggering a near-term breakout trade is Orexigen Therapeutics (OREX), which is focused on the development of pharmaceutical product candidates for the treatment of obesity. This stock has been a favorite name for the bulls, with shares up over 260% so far in 2012.

If you look at the chart for Orexigen Therapeutics, you’ll see that this stock has been uptrending very strong for the last three months, with shares soaring from a low of $3.76 to its recent high of $6.49 a share. During that uptrend, shares of OREX have been consistently making higher lows and higher highs, which is bullish technical price action. The stock has also just started to bounce right off its 50-day at $5.41 a share, and it's quickly moving within range of triggering a near-term breakout trade.

Traders should now look for long-biased trades in OREX if it can manage to break out above some near-term overhead resistance at $6.49 a share with high volume. Look for a sustained move or close above that level with volume that hits near or above its three-month average volume of 2.2 million shares. If that breakout triggers soon, then OREX will set up to re-test or possibly take out its next major overhead resistance level at $7.73 a share. Any high-volume move above $7.73 will put $8 to $10 a share into focus for OREX.

Traders can look to buy OREX off weakness as long as it’s trending within range of its 50-day at $5.41 a share. Simply use a stop a few percentage points below its 50-day, possibly down near $5 a share. One can also buy off strength once OREX takes out $6.59 with volume and then simply use a stop at around $6 a share. I would look to add to either position once OREX clears $7.73 with high volume.

Bridgepoint Education

One more stock that’s trading very close to triggering a major breakout trade is Bridgepoint Education (BPI), a provider of postsecondary education services whose academic institutions include Ashford University and University of the Rockies. Its institutions deliver programs primarily online, as well as at their traditional campuses. This stock has been smacked down by the sellers so far in 2012, with shares off by over 55%.

If you look at the chart for Bridgepoint Education, you’ll notice that this stock has been trending sideways for the past three months, with shares moving between $9.50 on the downside and $11.96 on the upside. Shares of BPI are now starting to trend within range of its 50-day at $10.39, and its moving very close to challenging some near-term breakout levels.

Traders should now look for long-biased trades in BPI once it manages to clear some near-term overhead resistance levels at $10.33 to $11.44 a share, and then once it takes out $11.96 a share with high volume. Look for a sustained move or close above those levels with volume that tracks near or above its three-month average volume of 440,069 shares. If that breakout triggers soon, then BPI will set up for a potentially explosive move. Some upside targets that could get hit are $14 to $17 a share.

One could look to buy BPI off any weakness to anticipate that breakout, and simply use a stop that sits just below some near-term support at $9.50 a share. Traders can also just buy off strength once BPI starts to take out those breakout levels with volume, and then simply use a stop a few percentage points below its 50-day at $10.39 a share. Look to add to either position once BPI clears $11.96 with heavy volume.

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.