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5 Stocks With Relative Strength Poised to Break Out - 18658 views
WINDERMERE, Fla. (Stockpickr) -- U.S. stocks are once again trending lower today as market players reacted negatively to weak overseas economic data and as the market registered its worst quarter in years. Unfortunately for the bulls, quarter-end window dressing has turned into window undressing as large traders continue to sell and ask questions later.
At last check, the Dow Jones Industrial Average was down almost 150 points while the S&P 500 was off by 19 points. The tech-heavy Nasdaq was dropping by 44 points.
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On days like today, I scan the markets for countertrending stocks are displaying relative strength and frustrating the bears. If the short-sellers can’t knock these names down today, then there could be an underlying bid on these stocks that makes them attractive buys. An even more bullish sign is a stock displaying relative strength that's either approaching a breakout or breaking out on a big down day like today.
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 trade higher from current levels.
One stock that’s displaying some relative strength today and is also setting up for a big breakout is Pandora Media (P), which operates as an Internet radio company in the U.S., providing its radio service to traditional computers as well as smartphones. This stock has been trending lower so far in 2011, with shares off by around 20%.
If you take a look at the chart for Pandora Media, you’ll notice that this stock has been crushed lower from its July high of $21.20 to its current price of just over $13.60 a share. Shares of Pandora recently found some big buying support at around $9.30 to $10 a share, which is an area the stock based at for over a month. Now Pandora looks ready to trigger a major breakout since the shares are starting to move above its 50-day moving average of $12.77, and it’s closing in on some big overhead resistance at $14.20 to $14.55 a share.
Traders should look to play the breakout in Pandora by either buying off of any weakness or simply waiting for the breakout to trigger and buying off strength. If you buy off weakness, then simply use a mental stop just below the 50-day in case the breakout doesn’t materialize. If you buy it off strength then enter long once it takes out $14.20 to $14.55 with volume. Look for volume that’s tracking in close to or above its three-month average action of 1.1 million shares.
This stock has a very high short interest, with over 11% of the tradable float currently sold short by the bears. The short-sellers have also been increasing their bets from the last reporting period by a whopping 24.5%, or by about 1.6 million shares. If the breakout in Pandora triggers soon, then expect a big move since the next significant resistance levels won’t be hit until $17 to $19 a share.
Pandora shows up on a list of stocks with the most hedge-fund action in the most recently reported period.
Another stock displaying strength and also setting up to breakout is CalAmp (CAMP), which develops and markets wireless communications solutions that deliver data, voice and video for critical networked communications and other applications. This stock has basically traded flat on the year, with shares up 2.5%.
Earlier this morning, CalAmp reported that it swung to a second-quarter profit as revenue jumped 15% due to growth in its wireless datacom division. This bullish earnings news has sparked a nice rally in the stock today with shares up over 10% on heavy volume.
If you take a look at the chart for CalAmp, you’ll see that this stock fell from its July high of $3.98 to a recent low of $2.60 a share. After hitting $2.60 a share, the upside volume started to move into this stock in a big way as the shares rallied up to its current price over $3 a share This hot stock has now managed to trade back above its 50-day moving average of $3.11 and 200-day moving average of $3.17 on heavy volume. Volume has already registered over 330,000 shares, which is well above its three-month average volume of 180,500 shares.
At last check, this stock has just triggered a breakout with the stock now trading above some big near-term overhead resistance at around $3.14 to $3.16 a share. If this move can hold into the close, then we could see this stock start to trend all the way back towards those July highs of $3.98 a share. I would look to buy this stock if it closes above $3.16 and simply use a stop just below the 50-day moving average.
If we get the move I am looking for back to $3.98 -- and that price level is taken out with volume -- look for an even bigger spike higher. I say this because the stock hasn’t traded over $3.98 since 2007. Keep this name on your trading radar for the coming days and weeks, since the upside potential is enormous.
One name in the biotech complex that’s displaying relative strength today and setting up for a major breakout is Seattle Genetics (SGEN), a clinical stage biotechnology company focused on the development and commercialization of monoclonal antibody-based therapies for cancer and autoimmune diseases. This stock is off to a hot start in 2011, with shares up by over 30%.
If you take a look at the chart for Seattle Genetics, you’ll see that this stock is a trader’s dream. After shares hit a high in June at $21.41 the stock plunged down to its recent low in August at around $12.29 a share. Then, after hitting that low, the stock soared back up to its current price of just over $19 a share. That huge spike higher has now taken SGEN back above its 50-day and 200-day moving averages. This action is the poster child for volatility on any equity you’ll ever see.
Traders should now watch SGEN for a major breakout if the stock can manage to take out some big overhead resistance at around $20.57 to $21.41 a share. A move above those levels with volume could set this stock up for a big spike since it would move the stock into all-time-high territory.
You could be a buyer of this stock off any weakness and simply stop out of the trade if it moves back below some near-term support at around $18 to $17.76 a share. Or you could buy it off strength and enter long once it takes out $20.57 to $21.41 with volume. Look for volume that’s tracking in close to or above its three-month average action of 2.3 million shares.
This stock is stacked to the roof with short-sellers, considering that over 26% of the tradable float is currently sold short by the bears. The bears have also been increasing their bets from the last reporting period by 6.1%, or about 1.7 million shares. If we get that breakout, then look for a massive move higher since this name is so heavily shorted. Remember, almost nothing is worse for a short-seller than being short a stock printing all-time highs.
A stock in the computer storage device complex that could be setting up for a big breakout is Stec (STEC), a global provider of enterprise-class Flash-based solid-state drives designed for enterprise-class hardware that companies use to retain and access their critical data. The bears have cleaned up on this stock so far in 2011, with shares off by a whopping 40%.
If you look at the chart for Stec, you’ll notice that this stock gapped down big in August from around $17 a share to below $10 a share. This gigantic gap down was accompanied by massive selling volume. After that event, the stock has now started to form a basing pattern between $8.30 and $10.50 a share. This sideways basing pattern could set the stock up for a big breakout if it can manage to sustain a move above its 50-day of $10.29 and above its gap down day high of $10.64 a share.
I would look to buy this stock if you see $10.64 taken out to the upside on strong volume. Look for volume that’s tracking in close to or above its three-month average action of 2 million shares. If you want to anticipate this move you could be a buyer in the near-future off any weakness and simply use a mental stop just below $10 a share. You can also buy off strength and simply enter this name long once takes out $10.64 with volume.
This is another name with a gigantic short interest, since 27% of the tradable float for this stock is currently sold short by the bears. If we see a move over $10.64 a share soon then I am expecting a sharp move higher as that gap down comes in play. Since STEC is so heavily shorted, we could easily see a 20% or more move here, so be ready to trade this.
One more stock that’s displaying relative strength today and potentially setting up to trend higher is Endo Pharmaceuticals (ENDP), a specialty health care solutions firm focused on branded products and generics, and devices and services. This stock has been far from a strong name in 2011, with shares off by around 19% so far.
This stock has been slaughtered by the sellers in the last three months, with shares dropping from a July high of $42.09 to the current price of just over $28.50 a share. That massive slide lower has now taken this stock below both its 50-day and 200-day moving averages, which is bearish. That said, things could be about to change in terms of the trend for this stock.
If you look at the chart for Endo Pharmaceuticals, you’ll notice that this stock is approaching a breakout if it can manage to trade above a key descending trend line that started back in August when the stock hit $34 a share. This trend line has marked an area of stiff resistance, since every time in the past few months the stock has hit that level, shares have sold off. A new trending move above that level could now setup ENDP to rip higher.
Traders should watch for a move above $29.50 with volume to signal that this stock could be ready to switch from a bearish downtrend to a bullish uptrend. At least in the short-term, that’s what I would be looking for. If we get that move, then the stock could quickly make a run at its 50-day moving average of $31.85 a share or possibly right back to that August high of $34 a share.
One could simply be a buyer off weakness and simply use a stop just below its recent low of $27.69 a share. You could also buy the breakout but dump the trade quick if the stock trades back below $29.50 after breaking out. Look for a breakout that comes with volume that tracks close to or well above its three-month average action of 1.3 million shares. I like that this stock is trading up today in a weak tape, so keep this name on your radar in case that’s signaling that the bulls see value here.
As of the most recently reported period, Endo is one of the top holdings of D.E. Shaw.
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.