- 5 Stocks Poised for Breakouts
- Do You Own These 5 Toxic Stocks? Watch Out!
- 5 Stocks Under $10 Set to Soar
- 5 Stock Charts Screaming 'Buy' in March
- 2 Stocks Spiking on Unusual Volume
5 Stocks Ready to Break Out This Month - views
BALTIMORE (Stockpickr) -- It's only Tuesday, but it's already been an eventful week on Wall Street.
Mobile phone maker BlackBerry (BBRY) announced that the takeover plan being pursued by its biggest shareholder fell through, tanking shares in yesterday's session. Twitter revealed that it would likely price its oversubscribed IPO higher than initially planned. And news hit that legendary hedge fund SAC Capital was shutting its doors and paying a record $1.8 billion fine to the government after drawn-out insider trading allegations.
Sure, those are some big headlines, but ignore them. They might make for some interesting reading, but they're not going to make you any money. Instead, there are plenty of names that look a whole lot more promising right now.
That's why we're taking a closer technical look at five individual names with breakout potential this week.
For the unfamiliar, technical analysis is a way for investors to quantify qualitative factors, such as investor psychology, based on a stock's price action and trends. Once the domain of cloistered trading teams on Wall Street, technicals can help top traders make consistently profitable trades and can aid fundamental investors in better planning their stock execution.
Without further ado, let's take a look at five technical setups worth trading now.
2013 has been a pretty good year for Costco Wholesale (COST); the king of the club stores has rallied more than 20% since the first trading day of the year. But that winning streak may not be over for shareholders who've kept holding on. Here's how to trade it.
Costco is currently forming a bullish price pattern called an ascending triangle. The pattern is formed by a horizontal resistance level above shares at $120 and uptrending support to the downside. Basically, as COST has bounced in between those two technical level since this past summer, all the while getting squeezed closer and closer to a breakout above that $120 resistance level. The breakout is the buy signal in this stock -- and we're getting a meaningful test of it this week.
It's still a little early to call Costco's breakout confirmed. Shares closed above that $120 level in yesterday's session but only by a measly 37 cents. If shares can hold above $120 today, consider the breakout confirmed. If you decide to jump in here, I'd recommend keeping a protective stop at $112.
We're seeing the exact same trading setup in shares of Rockwood Holdings (ROC) right now, only stretched out much longer term. ROC has actually spent most of 2013 stuck consolidating in an ascending triangle pattern of its own, with resistance in place at $68. Despite some attempts at pushing through that price level back in late September, ROC is still in the pattern.
That makes $68 the price level to watch in November.
Momentum, measured by 14-day RSI, adds some extra evidence that this latest bounce in ROC will hold. The 30 level in RSI has acted as a momentum floor over the course of this setup, and it's getting touched again. Expect a move through 70 on that momentum gauge to precede a breakout.
If you decide to be a buyer when that happens, I'd recommend keeping a stop on the other side of the 200-day moving average.
Microsoft (MSFT) is another name that's spent much of the last year consolidating, in this case through a rounding bottom pattern. The rounding bottom looks a lot like it sounds; it's formed by a horizontal resistance level to the upside and curved support below that. The setup indicates a gradual shift in control from sellers to buyers, a fact that should be music to the ears of anyone who owns MSFT right now.
The resistance level to watch now is at $36. A move through that price ceiling is the signal that buyers are in control of shares, and upside is a high-probability trade. Typically, rounding bottoms come into play at the bottom of a stock's recent price action, not the top (as in MSFT's case). But while this setup isn't textbook, the trading implications are every bit as bullish here.
Relative strength (not to be confused with RSI at the top of the chart) looks strong in MSFT right now. Statistically speaking, that's good sign that this stock is likely to continue to outperform for the next eight to 10 months. When the $36 breakout happens, I'd be a buyer -- and we're very close right now.
Lions Gate Entertainment
$5 billion film studio Lions Gate Entertainment (LGF) hasn't done a lot in the last coupe of months, but that doesn't mean its not tradable. Right now, LGF is forming a rectangle pattern, a consolidation setup that's formed by a horizontal resistance level above shares at $37.50 and horizontal support below them at $34. The rectangle pattern gets its name because it basically "boxes in" shares between those two levels -- the signal to watch is the break outside of that box.
A move through $37.50 is a signal that it's time to be a buyer in Lions Gate, while a breakdown through $34 means that it's time to sell.
Whenever you're looking at any technical price pattern, it's critical to think in terms of those buyers and sellers. Rectangles, triangles, and other pattern names are a good quick way to explain what's going on in a stock, but they're not the reason it's tradable instead, it all comes down to supply and demand for shares.
That $37.50 resistance level is a price where there has been an excess of supply of shares; in other words, it's a place where sellers have been more eager to step in and take gains than buyers have been to buy. That's what makes a breakout above it so significant -- the move means that buyers are finally strong enough to absorb all of the excess supply above that price level. Don't be early on this trade.
Hercules Technology Growth Capital
And now for something completely different: Hercules Technology Growth Capital (HTGC) is a closed-end fund, but that doesn't mean that you shouldn't trade it like any other listed stock. Best of all, you don't have to be an expert technical analyst to figure out what's going on in HTGC right now. This setup is about as simple as it gets.
HTGC has been bouncing its way higher in an uptrend for months now. In fact, this fund's uptrend actually extends another six months beyond what the chart shows -- the trend it just that strong right now. Since the bear trap in April and May, though, shares have caught a bid off of support five times, and they're testing a sixth attempt. It makes sense to buy HTGC on the bounce off of support.
Buying off a support bounce makes sense for two big reasons: It's the spot where shares have the furthest to move up before they hit resistance, and it's the spot where the risk is the least (because shares have the least room to move lower before you know you're wrong). Remember, all trend lines do eventually break, but by actually waiting for the bounce to happen first, you're ensuring the Hercules can actually still catch a bid along that line.
To see this week's trades in action, check out the Technical Setups for the Week portfolio on Stockpickr.
-- Written by Jonas Elmerraji in Baltimore.
At the time of publication, author had no positions in stocks mentioned.
Jonas Elmerraji, CMT, is a senior market analyst at Agora Financial in Baltimore and a contributor to TheStreet. Before that, he managed a portfolio of stocks for an investment advisory returned 15% in 2008. He has been featured in Forbes , Investor's Business Daily, and on CNBC.com. Jonas holds a degree in financial economics from UMBC and the Chartered Market Technician designation.
Follow Jonas on Twitter @JonasElmerraji