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5 Stocks Poised for Breakouts - 26109 views
WINDERMERE, Fla. (Stockpickr) -- U.S. stocks are under heavy selling pressure today after a disappointing monthly jobs report showed that hiring in the U.S. slowed in May.
The Labor Department report showed that only 54,000 jobs were created in May, vs. a rise in nonfarm payrolls of 232,000 jobs in April. The report also showed that the unemployment rate jumped to 9.1% in May from 9% in April. Make no mistake about it, the headlines will read that the drop in stocks is due to this disastrous job data -- but the market is far more focused on how the Federal Reserve will move in the coming months with its quantitative easing policy.
The weaker the economy looks, the more likely it is going to be that the Fed will continue to do more QE. The $64,000 question is how the market will react to more QE -- or to the less likely chance now that the Fed stops QE. From my end, I think the market would be in far better shape if QE is stopped, because it would mean that the economy is finally back on track. This would mark an end of government intervention into our capital markets, which many free market capitalists are dying to see. That said, a third round of quantitative easing might be seen as a desperate move by the markets, since QE2 has failed to show any significant economic gains.
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The Fed has really painted itself into a corner now. I wouldn’t just expect stocks to rise unabated again if we do get a third round of QE. As the next major Fed meeting approaches in late June, traders might be in a “risk-off” mode as they wait to see how things play out. Regardless of what the Fed ultimately does, there are still plenty of stocks setting up to break 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 look poised to break out and potential trade higher from current levels.
One stock that has already started to break out is Affymetrix (AFFX), which develops, manufactures and sells products and services for genetic analysis to the life science research and clinical healthcare markets. This stock is off to a solid start in 2011, with shares up over 37%.
If you take a look at the chart for Affymetrix, you’ll see that this stock has started to break out above some past overhead resistance at around $6.57 a share. What I absolutely love about t
his breakout is that it’s coming on monster volume. Volume for the last two trading sessions (both up days and one the breakout day) have clocked in at 3.8 million and 8.5 million shares. This volume isn’t just better than the three-month average volume of 1.06 million -- it's blowing it out of the water in spades.
The stock is moving up again today, and volume is once again tracking in very strong, with over 2.6 million shares traded so far. One could be a buyer of this stock on any weakness, with a stop just below the breakout price of $6.57 a share. Understand that the stop I am providing is just a guide and the stock could pull back even more and still remain in its bullish uptrend.
The next significant resistance level on Affymetrix won’t come into play until $8.38 a share. If you get long and the stock takes out that level with strong volume, I would add aggressively to the position. Look for a run back toward $10.06 a share, which is the 2009 high on this stock.
This is an extremely heavily shorted stock. The current short interest as a percentage of the float for Affymetrix is a rather large 16.4% as of May 13. Now that shares of Affymetrix have started to break out, those shorts are going to start sweating even more about whether they should cover their positions, or risk losing more money.
GT Solar International
Another stock that has already started to break out is GT Solar International (SOLR), which through its subsidiaries is a global provider of polysilicon production technology, crystalline ingot growth systems and related photovoltaic manufacturing services for the solar industry. Basically, GT Solar is the arms dealer for the solar complex. This stock is off to a blazing start in 2011, with shares up over 40%.
Shares of GT Solar are rocking higher today by 14% after the company was hit with two bullish pieces of news. The first release was that the company received its largest order ever of $460.4 million from a Chinese company. The second was that it was hit with a price target raise out of Piper Jaffray from $20 to $24 a share.
If you take a look at the chart for GT Solar, you’ll see that the stock had been trading in a channel pattern for the past six months between $9 on the lower end and $12 on the upper end. In just the past few weeks, the stock has started to soar above $12 a share on heavy volume. Volume today has already registered 6 million shares, which is well above the three-month average volume of 3.5 million shares.
This stock is now trading at a new 52-week high at $13.55 a share. One could be a buyer of this stock on any weakness as long as it stays above the breakout price of $12 a share. The strong buildup in upside volume and the recent positive price action suggest to me that this stock wants to trend significantly higher.
Keep in mind this is heavily shorted stock. The current short interest as a percent of the float for GT Solar sits at around 8.2% as of May 13. The shorts have already been dead wrong on this stock, and they just added 275,700 new shares short from the last reporting period. GT Solar could continue to get short squeezed for some time to come if the stock remains in an upward trajectory.
If you’re looking for an energy stock that looks poised to break out, then take a look at the chart for oilfield services company Halliburton (HAL). Halliburton’s two business segments are the completion and production segment and the drilling and evaluation segment. This stock is off to a strong start in 2011, with shares up over 20%.
If you take a look at the chart for Halliburton, you’ll see that this stock is quickly approaching a major breakout if it can manage to take out some past overhead resistance at around $51 to $51.50 a share. The chart also shows how the stock has been trading inside of a channel pattern for the last six months between $42.50 on the lower end, and $51 on the upper end. Now Halliburton looks ready to start a new bullish phase if can manage to close above $51.50, which would move it outside of the pattern.
It would be constructive to see a volume move above $51.50 in the coming days on volume that’s well above the three-month average action of 11.8 million shares. If we do get a strong-volume breakout, I would look to buy this stock with tight mental stop in case it fails to hold the breakout.
It looks like market players want exposure back into the oil service sector, and Halliburton could be the go-to stock since it has remained strong even while crude oil trended lower recently.
Halliburton, one of 22 holdings in T. Boone Picken's BP Capital portfolio, shows up on a recent list of 11 Energy Stocks Hedge Funds Love.
If you’re looking for an emerging-market breakout stock play, then take a look at MercadoLibre (MELI), also known as the eBay (EBAY) of Latin America, which hosts an online commerce platform in Latin America. This stock is off to a solid start in 2011, with shares up over 35%.
In case you’ve missed it, there is going to be a ton of social networking companies that are going to be coming public in the coming weeks and months. This IPO action is going to generate a lot of interest in MercadoLibre, since the company has a bit of of social twist to it, being such a big player in online transactions in Latin America.
If that’s not enough to get you interested in MercadoLibre, then consider how strong this stock has been acting while the rest of the market has been pulling back. In the past month, the stock is up 3% while the Nasdaq has dropped 2.7%, and now shares are only a few points off their all-time highs.
If you take a look at the chart for MercadoLibre, you’ll see that shares are quickly approaching a major breakout if the stock can manage to trade above some past overhead resistance at around $92.25 to $93 a share. It’s also worth noting that the stock has been trading inside of a channel pattern for the past couple of months between $82 on the lower end and $93 on the upper end.
Market players should now watch for the stock to breakout above $93 on strong volume that’s well above the three-month average action of 667,000 shares. One could be a buyer of this stock if we get that move and simply have a tight mental stop in place in case it fails to lead to much higher prices. Keep in mind that if MercadoLibre breaks out, it will be trading at all-time highs.
This is another heavily shorted stock that could cause the shorts to scramble to cover their positions if it does indeed break out soon. The current short interest as a percentage of the float for MercadoLibre sits at around 12.1% as of May 13. The bears are going to do everything they can to keep this stock from breaking out. If they fail, this stock could really take off once it takes out its 52-week high of $92.73.
MercadoLibre, one of TheStreet Ratings' top-rated Internet software and services stocks, is one of the top holdings of Chase Coleman's Tiger Global Management, which owned 3.3 million shares as oft eh most recently reported quarter.
Brocade Communications Systems
One more breakout candidate that operates in the technology complex is Brocade Communications Systems (BRCD), which supplies networking equipment comprising end-to-end Internet protocol-based Ethernet and storage area networking solutions. This stock has been ripping higher so far in 2011, with shares up over 35%.
If you take a look at the chart for Brocade Systems, you’ll see that this stock has just started to trade above some past overhead resistance at around $6.78 to $6.88 a share.
Once again, this is a breakout candidate that is trading through prior resistance on heavy volume. Volume during the past two trading sessions (both up days and the breakout day) clocked in at 21 and 56 million shares. This was some monster volume compared to the three-month average activity of just 11.3 million shares. Volume already today has registered almost 16 million as the stock continues to trend higher.
One could be a buyer of this stock on any weakness as long as it can hold above those breakout levels. The next area of significant past resistance sits at around $8 a share. I would add aggressively if it takes out $8 with big volume. The 2009 high on this stock sits at around $9.50 to $9.84, so we have plenty of upside if BRCD is ready for primetime.
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.