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5 Stocks Poised for Breakouts - 16461 views
WINDERMERE, Fla. (Stockpickr) -- U.S. stocks finished lower on Friday as traders remained cautious due to the continued uncertainty surrounding the European sovereign-debt crisis, specifically focused on Greece and the possibly consequences for the euro.
That uncertainly was only heightened Friday after German Chancellor Angela Merkel said few countries in the G-20 had committed to providing more resources for a eurozone rescue fund. Market players seemed to be in a risk off mood since the possible failure of Europe to agree on a eurozone bailout package could be another nightmarish scenario for the markets.
Despite the weakness in the broad indices on Friday, there were many stocks that were breaking out and printing new 52-week highs. One example of both was coffee king Starbucks (SBUX), which reported solid earnings and saw its stock close very close to its all-time high of $44.69, which was hit earlier in the day.
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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. 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 are setting up to break out and potentially trade higher from current levels.
One stock that’s setting up to break out 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 has trended a slight bit lower in 2011, with shares off by around 14%. That said, the stock was trending strong on Friday, with shares popping by over 12%. That big spike was due to the fact that Skullcandy moved to a profit in the third quarter, as sales surged more than 57%.
If you take a look at the chart for Skullcandy, you’ll notice that this stock IPO'd back in July near $23 a share and plunged to a low hit in October of $11.81 a share. After hitting that low, the stock has been uptrending and moving back above its 50-day moving average of $15.08. This stock now sets up to trigger a big breakout if it can manage to sustain a move and close above $17.90 and Friday’s high of $18.10 a share.
Market players should watch for this stock to close above those two levels in the coming days or weeks on heavy volume. Look for volume on that potential move that comes in close to or above its three-month average action of 340,300 shares. On Friday, volume finished at over 2 million shares, but the stock closed off the highs.
You could be a buyer of this stock off any weakness and simply place a mental stop a few percentage points below Friday’s low of $16.25. Or you could buy off strength with an intraday move that holds over $17.90 to $18.10 a share. Use a mental stop just below $17.90 if we see that breakout in the coming days or weeks. Target a run off any breakout that takes this stock back towards $20 to $23 a share.
The short-sellers seem to love this stock since over 33.9% of the tradable float is currently sold short. The bears have also been increasing their bets from the last reporting period by 27%, or by about 984,300 shares. Those short-sellers could be in for a world of hurt if this stock breaks out soon, so keep an eye on it.
Another stock that’s worth putting on your breakout trading radar is Peregrine Pharmaceuticals (PPHM), a clinical-stage biopharmaceutical company that develops and manufactures monoclonal antibodies for the treatment of cancer and viral infections. The sellers have hammered this penny stock in 2011, with shares off by over 53%.
If you take a look at the chart for Peregrine Pharmaceuticals, you’ll see that this stock has been downtrending since its July high of $2.27 to a recent low of 95 cents a share. After printing that low, the stock formed a basing or sideways pattern between $1.18 and around $1 a share. The buyers seem to love this stock at $1 since volume on Friday registered 2.5 million shares (stock closed up 3.9%) which is well above its three-month average volume of 508,600 shares.
Market players should now watch to see if that huge volume triggers a monster run that breaks PPHM out above its 50-day moving average of $1.16, and above that overhead resistance zone at $1.18.
You could be a buyer of this stock off any weakness and simply use a mental stop under $1 to 97 cents in case the breakout never materializes. I would then add to any long position once the 50-day and $1.18 are taken out to the upside. Target a run back towards $1.30 or possibly the 200-day moving average of $1.86 if the bulls come in here in a big way and buy the stock.
Peregrine has a decent short interest with 6.2% of the tradable float sold short by the bears. If the buyers are truly coming in here near $1, then this is the last stock I would want to be short considering that heavy upside volume we saw on Friday. Keep this name on your radar.
A biotech player that soared on Friday and now sets up to trigger a major breakout is Amag Pharmaceuticals (AMAG), which is focused on the development and commercialization of a therapeutic iron compound to treat iron deficiency anemia. Despite the 17% move up on Friday, the stock is still down 10% on the year.
Shares of Amag Pharma ripped higher after the company said its CEO had resigned and it will begin a restructuring that includes cutting about 25% of its jobs and as much as $25 million in operating expenses.
If you take a look at the chart for Amag Pharma, you’ll notice that this stock was crushed by the sellers from its July high of $19.48 to a recent low of $12.65 a share. After printing that low, the stock formed a basing pattern between $13 and $15 a share. Shares of Amag have now broken out above $15 and back above its 50-day moving average of $16.18 on massive volume.
Volume on Friday registered 1.168 million shares, which is well above its three-month average volume of 361,600 shares. Traders should now watch for another breakout trade to trigger if the stock can sustain a move and close above resistance at $16.32, and above Friday’s high of $16.52.
You could be a buyer of this stock off any noticeable weakness and anticipate the breakout, or you could just buy off strength once the breakout triggers. If you buy of weakness, simply place a stop just below $15.30. If you buy off strength, get long once $16.32 to $16.52 a share are taken out, and use a mental stop just below the 50-day moving average. Target a run back towards some previous overhead resistance at $19.12 to $19.48 a share.
It’s worth mention that Amag Pharma is a heavily shorted stock since 10.6% of the float is currently sold short by the bears. Once we clear $16.52 with volume, then another large short-squeeze could easily kickoff like we saw on Friday.
CSG Systems International
A stock in the computer services sector that looks poised to break out is CSG Systems International (CSGS), which is engaged in providing outsourced customer care and billing solutions to the North American cable and direct broadcast satellite markets. This stock is off to a slow start in 2011, with shares off by around 20%.
If you look at the chart for CSG Systems International, you’ll notice that this stock was hammered by the bears from its July high of $19.60 to a recent low of under $13 a share. After printing that low, shares of CSGS formed a basing pattern between $12 and $14 a share. The stock has now started to break out of that pattern and challenge some overhead resistance at $14.96 with strong volume. Shares closed at $14.97 on Friday, so look for the stock to continue the breakout in the coming days and weeks.
If you’re bullish on CSGS, you could get long above $14.96 and simply use a mental stop a few percentage points below that level. Look for volume to track in close to or above its three-month average action of 298,600 shares, if the stock holds above $14.96. Target a run back towards the 200-day moving average of $17.30 a share or possibly even higher if the bulls gain full control of this stock.
One more stock that’s closing in on a major breakout is solar energy player Suntech Power (STP). The sellers have dominated this stock this year with shares off by a whopping 65%.
If you look at the chart for Suntech Power, you’ll notice this stock was crushed by the bears from its July high of $8.04 to a recent low of $1.70 a share. After hitting that low, the stock has rebounded and started to print higher lows and higher highs, which could be the start of a bullish trend change. Traders should now watch for a breakout trade to trigger once STP moves back above its 50-day moving average of $3.12 on heavy volume.
Volume on Friday, when the stock closed up 10%, was tracking in at over 7 million shares, which is well above the three-month average action of 4.6 million shares. Some of that move was spurred by rumors that LG Electronics might be looking to buy the company. LG Electronics denied the reports saying it was groundless. Regardless, volume was strong so traders should keep this stock on their radar.
If you’re bullish on this stock, one could be a buyer off any near-term weakness and anticipate the breakout. I would use a stop just below some near-term support at $2.43 a share. I would add to any long position after the stock takes out the 50-day with volume, and then add again above some near-term overhead resistance at $3.44 a share. This is one I would watch very closely, because a run back towards the next significant resistance level at $5.44 or the 200-day moving average of $6.92 is possible.
It’s worth pointing out that the current short interest as a percentage of the float for STP is a rather large 10.2%. The bears have also been increasing their bets from the last reporting period by 8.5%, or by about 1.43 million shares. A major short squeeze could easily develop here, so monitor this name in the coming days and weeks.
-- 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.