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5 Stocks Poised for Breakouts - 61186 views
WINDERMERE, Fla. (Stockpickr) --If you like wild swings and massive volatility in equity prices, then the U.S. stock market has been the place for you to be this week.
Let’s take a quick look at how the market traded in what many professional traders are calling one of the most memorable weeks of their careers. The Dow Jones Industrial Average plunged 624 points on Monday. On Tuesday, it rose 429 points. On Wednesday, it lost 509 points. And on Thursday, it traded up 414 points. This action marked the first time in history that the Dow saw swings of 400 points or more for four consecutive trading sessions. Recently on Friday, the Dow was up about 100 points.
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It’s often said among the technical analysts community that massive volatility, huge volume and wide price ranges occur at bottoms and tops in the stock market. This week we saw all of that in the U.S. markets -- which could very well be signaling that a solid trading bottom has been put in place for U.S. stocks. That doesn’t mean the market won’t go lower; it just means that the probability for upside is high because of the volume and price action we have seen during the last few trading sessions.
No matter what the overall market is doing, there are always stocks that are breaking out and trending higher. An excellent example of this was two of the breakout stocks I highlighted last week: Caribou Coffee (CBOU) and Merge Healthcare (MRGE). As the market fell apart, these stocks did not, and both are notably higher from last week’s price levels.
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 potential trade higher from current levels.
One stock that’s quickly approaching a major breakout is Consolidated Edison (ED), which, through its subsidiaries, provides electric, gas and steam utility services in the U.S. This stock is off to a decent start in 2011 with shares up over 9%.
If you take a look at the chart for Consolidated Edison, you’ll see that this stock is approaching a major breakout if it can manage to trade above some past overhead resistance at around $54.36 a share. Briefly today, the stock did move above that breakout level when it hit $54.87 a share, but it has since then pulled back to below $54. Traders are now going to want to monitor this stock for a breakout play if it can manage to close above its new 52-week high of 54.87 in the coming days or weeks.
What I like about the action in ED is that as the stock traded up towards the prior resistance at around $54 a share, the upside volume has been expanding dramatically. Volume for a number of recent up days clocked in at 6.1 million, 6 million and 5.6 million, which is well above its three-month average action of just 2 million shares. What traders should watch for now is for the stock to close above $54.87 a share on strong volume that’s close to or above that three-month average.
One could be a buyer of this stock on any weakness with a tight stop and anticipated the breakout, or just buy once the breakout has officially triggered with a close over $54.87 a share. The strong volume recently in this name tells me it wants to go higher, so keep this name on your radar.
One stock that’s already starting to break out is Mistras Group (MG), a global provider of technology-enabled asset protection solutions used to evaluate the structural integrity of critical energy, industrial and public infrastructure. This stock is off to a hot start this year, with shares up over 35%.
This is another like CBOU and MRGE that has held up incredibly well during the market’s recent slide. On Tuesday, this company reported strong revenue and earnings growth and guided for double-digit growth for 2012.
If you take a look at the chart for Mistras Group, you’ll see that this stock has already started to break out above some past overhead resistance at around $18.46 a share, with the stock currently trading at over $19 a share. This is a solid breakout for MG since the stock is trading well over 50 cents above the past resistance level. This shows that buyers of the stock have some strong conviction about buying it as it moves to a new 52-week high.
This is a major technical move for MG since it now puts the stock at new all-time-high levels. This means that just about anyone who has bought this stock in the past is up on their position. This also means that anyone short the stock is losing money. The bottom line here is that the trend is up clearly up for MG.
One could be a buyer of this stock on any weakness and simply place a stop a few percentage points below today’s closing price. Of course, make sure the stock closes today above $18.46 a share on strong volume. I would consider volume above its three-month average action of 113,631 as a constructive sign for this stock.
If you’re looking for a breakout candidate in the investment services sector, then take a look at CBOE Holdings (CBOE), one of the options exchanges in the U.S. The company, in addition to its core options trading business, provides marketplaces for trading futures contracts and cash equities through its subsidiary, CBOE Futures Exchange, and its affiliate CBOE Stock Exchange. This stock hasn’t done much so far in 2011, with shares up just over 5%.
If you take a look at the chart for CBOE holdings, you’ll see that this stock fell sharply recently from its May high of $28.36 a share to its current price of just over $24 a share. During that slide, the stock was making lower highs and lower lows, which is a very bearish trend for any stock. That said, now some big upside volume has started to flow into the stock at a recent low of $21.55 and shares of CBOE are starting to move above a key descending trend line.
Volume during a number of recent up days clocked in at 977,000, 1.08 million and 1.1 million, which is well above its three-month average action of 587,000 shares. What I like about this volume behavior is that it occurred while the stock broke above a key descending trend line that started back in late May. This could be signaling a trend change for CBOE is quickly approaching to the upside.
I would now look to buy this stock on any move that takes it above $24.17 a share and then $25.01 (the 200-day moving average) to $25.13 a share on strong volume. If the stock breaks out above all of those levels, then it could easily trend all the way back towards$26.50 to $28 a share, or even higher. Make sure you see some confirmation before you jump into CBOE, like a strong volume move above the 200-day moving average.
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One final breakout play in the biotechnology and drug complex is Regeneron Pharmaceuticals (REGN), which discovers, develops and commercializes pharmaceutical products for the treatment of serious medical conditions. This stock is quickly becoming a major market leader, with shares up over 60% so far in 2011.
If you take a look at the chart for Regeneron, you’ll see that this stock recently bounced big right off of its 200-day moving average of $42.80 a share to its current price just over $54 a share. Following that bounce, the stock has now broken out above a key descending trend line that started back in early July. That trend line was previously a big resistance level for this stock, but now shares of REGN have cleared it convincingly. This could be signally a new bullish trend change for REGN that might force anyone short the stock to cover and go long.
The only thing not convincing is the volume, which is currently tracking in at around 760,000 shares versus the three-month average volume of 1.16 million shares. Traders should watch to see how this stock closes today and if the volume can exceed that three-month average with the stock up sharply.
One could be a buyer of this stock on weakness as long as it can close above its 50-day moving average of $54.74 a share. I would use a mental stop below the 50-day moving average in case REGN isn’t ready for the primetime. I would add aggressively to any long position once this stock takes out $56.63 and then $61.28 a share on heavy volume. A big-volume move above $61.28 should be considered very bullish and could set this stock up for a run back towards its 52-week high of $71.74 a share.
One more stock that is worth eyeing for a breakout trade is Motricity (MOTR), a provider of mobile data solutions and services that enable wireless carriers to deliver mobile data services to their subscribers. If you want to see what shareholder value destruction looks like, then just glance at the performance for this stock in 201; shares are off by over 86%.
This company reported earnings on Tuesday, and Wall Street did not like what it had to say. Motricity’s second-quarter results missed Wall Street estimates, and the company guided third-quarter sales much lower than estimates due to lower-than expected revenue from its North American carrier business. Following that report, shares of Motricity plunged from over $4 a share to a 52-week low of $1.85 a share on monster volume of 14.4 million shares.
If you take a look at the chart for Motricity, you’ll see that this stock has been stuck in a nasty downtrend from the past six months falling from a high of $16.30 in late March to its current price of just under $2.50 a share. During that entire slide, the stock never once gave you a reason to buy it since it was clearly making higher lows and lower lows. This demonstrates that the trend was down and traders were selling rallies and pullbacks aggressively.
That said, now the stock looks like it might want to break out and start a giant bounce higher. The first thing supporting a possible breakout is that some huge upside volume has started to move into MOTR near its lows. Volume yesterday was 5.8 million (up day) and volume today has already clocked in at over 4.1 million (also an up day), which is well above its three-month average action of 1.6 million.
Since the stock gapped down big this week, the way to play a beaten-down stock like this for a breakout is to buy it once it moves above the gap-down days high. That move has started today with shares of MOTR up 18% and trading above that gap-down high of $2.35 a share on big volume.
One could simply be a buyer of this stock above $2.35 and stop out if it trades a few percentage points below that level. This stock is so oversold with a relative strength index (RSI) reading of 22 that it could easily fill the gap and bounce back above $4 a share from here. This is the type of situation when you buy into a stock that nobody wants and look for a sharp move up as the short-sellers cover and lock in their huge profits.
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.