Stock Quotes in this Article: KTOS, LNG, MRGE, PSDV, SODA

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 highlighted recently was in Amyris (AMRS). Last Friday, I wrote about the potential for a breakout trade for Amyris in my four stocks poised to break out article. I mentioned how AMRS was close to triggering a breakout trade if it took some key near-term overhead resistance levels.

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Guess what happened? Shares of Amyris went on to trigger that move, and that move came with monster volume. Now the stock is ripping higher again today and hitting new daily highs as I write this at $4.37 a share. This stock could easily hit its next significant overhead resistance levels at $6 to $6.69 a share before this breakout runs its course. Either way, this breakout has produced a monster move on a stock that trades under $5 a share.

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.

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

Merge Healthcare


One stock that’s trading within range of a major breakout trade is Merge Healthcare (MRGE), which develops software solutions that facilitate the sharing of images to create an electronic healthcare experience for patients and physicians. This stock has been hit hard by the sellers, with shares off by over 40% so far in 2012.

If you take a look at the chart for Merge Healthcare, you’ll notice that this stock was taken to the woodshed by the bears, after it fell from its March high of $6.65 to a recent low of $2.20 a share. During that sharp move lower, shares of Merge Healthcare consistently made lower highs and lower lows, which is bearish technical price action. That said, this stock has started to form a bottoming process during the last two months at around $2.20 to $2.36 a share. This stock is also now moving within range of triggering a near-term breakout trade.

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Traders should look for long-biased traders in MRGE if it can manage to trigger a breakout above some near-term overhead resistance at $2.95 a share with high volume. Look for a sustained move or close above $2.95 with volume that registers near or above its three-month average action of 1 million shares. If we get that action soon, then MRGE could easily re-fill a previous gap-down from May and trade up toward $4 to $5 a share.

One could be a buyer of MRGE off weakness and anticipate the breakout with a stop at around $2.50 a share. I think a better idea is to buy MRGE off strength and get long once it takes out $2.95 with volume. The best part about getting long above $2.95, is that it will also get you long above its 50-day moving average at $2.90 a share. I would also look to press this trade above $3.50 a share, since that’s the daily high from the gap-down day in May.

Keep in mind that MRGE sports a pretty decent short interest. The current short interest as a percentage of the float for MRGE is 10.4%. If we get that breakout soon, then we could easily see a sizeable short squeeze develop.

Cheniere Energy

Another stock that’s trading within range of a solid breakout trade is Cheniere Energy (LNG), an energy company primarily engaged in liquid-natural-gas-related businesses. This stock is off to a hot start in 2012, with shares up over 60%.

If you take a look at the chart for Cheniere Energy, you’ll see that this stock has sold off hard from its April high of $18.92 to a recent low of $10.51 a share. During that smack down, shares of LNG have consistently made lower highs and lower lows, which is bearish technical price action. That said, shares of LNG have started to rebound right off its 200-day moving average of $12.05 a share, and the stock is now moving within range of triggering a near-term breakout trade.

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Market players should now look for long-biased traders in LNG if it can manage to trigger a near-term breakout above some overhead resistance at $14.73 to $15.70 a share with high volume. Look for a sustained move or close above those levels with volume that hits close to or above its three-month average action of 6.2 million shares. If we get that action soon, then LNG has a great chance of re-testing and possibly taking out its next significant overhead resistance levels at $17.83 to $18.92 a share.

One could simply buy LNG once it clears $14.73, and then add more once it clears its 50-day moving average of $14.90 a share. I would then add again above $15.70 a share. You could buy off weakness below the 50-day, but I would rather get long this off strength.

This is another stock with a decent short interest. The current short interest as a percentage of the float for LNG stands at 11%. If this stock can start rocking back above those overhead resistance levels I mentioned, then we could easily see a solid short-covering rally kickoff.

pSivida

One stock in the biotechnology and drugs complex that’s trading within range of a major breakout trade is pSivida (PSDV), which, together with its subsidiaries, develops drug delivery products for treatment of back-of-the-eye diseases that are administered by implantation, injection, or insertion. This stock is off to a monster start in 2012 with shares up over 110%.

If you look at the chart for pSivida, you’ll see that this stock dropped pretty hard once it hit its April high of $2.55, since shares then dropped to a low of $1.76 a share in June. During that sharp slide lower, shares of PSDV were making lower highs and lower lows, which is bearish technical price action. That said, during the last month shares of pSivida have formed a double bottom chart pattern at around $1.76 to $1.78 a share. That bottom brought in buyer who have pushed the stock back above both its 50-day and 200-day moving averages. Now shares of pSivida are trading within range of a major breakout trade.

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Traders should now look for long-biased trades in PSDV if it can manage to take out some major overhead resistance levels at $2.80 to $2.85 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 70,847 shares. If we get that action soon, then PSDV has tremendous upside since the next significant overhead resistance level sits at $4 to $4.81 a share.

One could look to buy PSDV off weakness and simply use a stop at around its 200-day moving average of $2.18 a share. Or you could buy off strength and get long once PSDV takes out $2.80 to $2.85 with volume, and then simply use a stop at around $2.60 to $2.55 a share.

Sodastream International

Another stock that’s setting up to trigger a near-term breakout is Sodastream International (SODA), which, along with its subsidiaries, is engaged in developing, manufacturing and marketing home beverage carbonation systems and related products. This stock is off to a decent start in 2012, with shares up over 20%.

If you look at the chart for Sodastream International, you’ll notice that this stock has been uptrending strong since early June, with shares soaring from a low of $29.44 to today’s high of $41 a share. During that uptrend, shares of Sodastream International have been making mostly higher lows and higher highs, which is bullish technical price action. That move has also pushed SODA back above both its 50-day and 200-day moving averages, which is bullish. Now shares of SODA are quickly moving within range of triggering a major breakout trade.

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Market players should now look for long-biased traders in SODA if it can manage to trigger a breakout above some past overheard resistance that sits just above $42 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 action of 1.1 million shares. If we get that move soon, then SODA will have a great chance of filling its previous gap-down in February from around $48 a share. In fact, SODA could easily fill that gap and then take out its next significant overhead resistance level at $48.13 a share.

 

One could look to buy SODA off weakness to anticipate this breakout and simply use a stop at around $40 to $38 a share. You could also just buy off strength once $42 gets cleared with high-volume and then simply use a stop at around $40 a share or so.

This stock has some monster short-squeeze potential, since the current short interest as a percentage of the float for SODA is a whopping 59.4%. Believe me; the bears will become very nervous if SODA starts to take out $42 with volume. They know that if SODA moves into that previous gap, then the stock could rip to the upside.

Kratos Defense & Security Solutions

My final breakout trade idea today is Kratos Defense & Security Solutions (KTOS), a specialized national security technology business providing products, services and solutions for U.S. national security. Its core capabilities are engineering, manufacturing, system integration and test and evaluation offerings for national security platforms and programs. This stock hasn’t done much so far in 2012, with shares off by around 5%.

If you look at the chart for Kratos Defense & Security Solutions, you’ll see that this stock has been downtrending hard for the last four months, with shares plunging from a high of $7.17 to a recent low of $4.73 a share. During that sharp move lower, shares of Kratos Defense & Security Solutions have mostly made lower highs and lower lows, which is bearish technical price action. That said, after hitting that low of $4.73, KTOS has started to reverse that downtrend and start to uptrend, with shares now making higher lows and higher highs. This stock is also quickly moving within range of triggering a near-term breakout trade.

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Traders should now look for long-biased traders in KTOS if it can manage to trigger a break out above some near-term overhead resistance at $5.79 to $6.25 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 371,392 shares. If we get that move soon, then KTOS will move back above its 50-day moving average at $6.02 a share and it will have a great chance to re-test and possibly take out that March high of $7.17 a share.

One could look to buy KTOS off weakness and anticipate the breakout with a stop around its 50-day moving average of $5.34 a share. You could also get long off strength once it takes out $5.79 a share, and then add to the position once its clears its 50-day and that resistance level near $6.25 a share.

This is another breakout candidate with a decent short interest. The current short interest as a percentage of the float for KTOS is pretty high at 10.3%. If that breakout triggers soon, then KTOS could easily cause some big-time pain for the short-sellers if this stock wants to rip substantially higher.

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.