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5 Stocks Setting Up to Break Out - 38917 views
WINDERMERE, Fla. (Stockpickr) -- Stocks continued their upward swing on Friday as the market continued to shake off bad news and defy the bears.
The Dow Jones Industrial Average closed higher by 56.68 points at 12,341.83, and the S&P 500 closed up by close to 5.16 points to 1319.65. The tech-heavy Nasdaq also finished higher, by 4.43 points, at 2764.65
It seems that no matter what is thrown at this market, including disappointing earnings out of search king Google (GOOG) and banking giant Bank of America (BAC), equities continue to power higher. This has to be madly frustrating to the bears, but as always, it’s a lesson in why it pays to stick with the trend, or the path of least resistance.
To be fair, the market still hasn’t broken out above some key technical resistance areas, but it’s very close to doing so, and the trend remains up.
The breakout level to watch for on the Dow Jones Industrial Average is above 12,450.93 and on the S&P 500 is 1339.46 to 1344.07. On the Nasdaq, it’s 2815.55 to 2840.51. The Nasdaq remains the weakest of the three major U.S. indices, and the action in Google on Friday wasn’t helping matters after the stock finished down by 47 points, or about 8.2%.
It’s very important that traders watch how all three major indices behave in the next couple of days and weeks. It would be very bullish to see a weekly close on at least the Dow and S&P 500 that’s above those levels I mentioned. The Nasdaq probably has more work to do before it can attempt to break out, so don’t key off that index for now. If we do trade to new highs, then we’re going to see tons of stocks following the averages and breaking out as well.
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. With that in mind, here’s a look at a number of stocks that look poised to break out and trade significantly higher from current levels.
Mad Catz Interactive
One stock that’s setting up to break out is Mad Catz Interactive (MCZ), which engages in the design, manufacture, marketing and distribution of accessories for videogame platforms, personal computers and iPod and other audio devices. This stock is off to a fantastic start in 2011, with shares up over 111%. There’s no doubt that’s a great performance, but things could be setting up to get even better for this stock as it knocks on the door of all-time highs.
If you take a look at the chart for Mad Catz, you’ll see that the stock has been making higher lows and higher highs for the past six months. This is an extremely bullish chart pattern because it demonstrates that traders are buying at a higher price on any dip. Plus, the large upside volume spikes in the past couple of months show that traders are buying big even when the stock makes new highs. This tells me that the stock is in high demand from large institutional traders who have no problem paying up for the stock because they have conviction that the stock deserves to trade much higher from current levels.
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What market players should watch for now on MCZ is for a breakout above some past overhead resistance at around $2.39 a share. If that breakout does happen, I would like to see it on volume that’s well above the three-month average activity of 2.85 million shares. If we get the move, it’s going to be significant because it will take the stock to brand new all-time highs. There’s really no telling how high this stock could trend if that happens.
If you want to trade this stock, look to add it on any weakness and use a mental stop (physical stops are seen on exchanges) below the 50-day moving average. You could also wait and just buy the breakout as long as you see strong volume moving in to confirm that buying momentum is strong.
This stock isn’t heavily shorted (only 2.2% of total float), but it’s worth noting that the bears have been increasing their bets in a big way recently. As of March 31, short-sellers increased their positions by 56% or by around 431,000 shares. If MCZ can print new all-time highs, then it could prove to be a very painful short.
Another stock that looks poised to break out is Vanda Pharmaceuticals (VNDA), a biopharmaceutical company focused on the development and commercialization of clinical-stage products for central nervous system disorders. So far in 2011, this stock has trended down by around 18%, but that could be about to change rapidly.
If you take a look at the chart for Vanda, you’ll see that the stock is approaching a major breakout if it can manage to trade above some past overhead resistance at around $7.95 and then $8.33 a share. This stock jumped out at me as I scanned the market because volume yesterday was off the charts as it traded through the 50-day and 200-day moving averages.
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Total volume on Thursday clocked in at over 1.15 million shares, which is way above the three-month average volume of just 187,000 shares. The last time the stock saw monster upside volume like this was back in June of last year. Don’t ignore this volume, especially since it took the stock through those key moving averages. This one might be worth buying right here and adding to any long position as it takes out those breakout levels I mentioned. I would use a mental stop at around the 50-day moving average which is $7.28 a share.
It’s worth nothing that the current short interest as a percentage of the float for VNDA sits at around 5.7% as of March 31. The tradable float is 27 million shares, which is very small, so a short squeeze could easily develop here if hedge funds and momentum traders jump in.
One more interesting thing about VNDA is that the stock is literally trading at cash levels, fetching around $7.70 a share. The company has a total cash position on its balance sheet of $198.04 million and zero debt, which works out to $7.05 in cash per share for VNDA. Basically, this means that the market sees no upside in its business.
One stock that’s already started to break out is Perfect World (PWRD), an online game developer and operator in the People’s Republic of China. This stock hasn’t done much so far in 2011, with shares up only by 6%, but that could be about to change in a big way.
If you take a look at the chart for Perfect World, you’re going to see that a major breakout is under way. The stock is starting to move above some major past overhead resistance at around $24 to $24.42 a share. Since last December, this stock has done nothing but fail every time it has traded around those resistance levels. The stock’s action right now is very bullish because it appears it’s ready for some prime time upside action.
Market players could buy this stock right now with a stop at, say, around $24 a share. Potential upside here is massive because PWRD has had a gap-down in price from last November that could get filled and take shares to the mid-$30s.
It’s also worth noting that this stock is ridiculously cheap when you consider it’s trading at a forward price-to-earnings of just 8.2 with growth estimates for next year above 20%. Perfect World is also cash-rich, with around $272.07 million in cash on its balance sheet and zero debt.
Perfect World shows up on a recent list of 12 Small-Cap Internationals Gaining Traction.
If you’re looking for a market leader that’s nearing a major breakout, then make sure you check out the chart for Deckers Outdoor (DECK), which engages in the design, production, marketing and brand management of footwear and accessories for outdoor activities and everyday casual lifestyle. Over the last year, this stock is up over 107%, and so far in 2011, shares are up around 18%.
If you take a look at the chart for Deckers, you’ll see that the stock is approaching a big breakout if it can manage to close above some past overhead resistance at $94.70 a share. The stock challenged that level on Friday but ended up closing just below it at $94.27 a share. Volume trends on DECK have been very strong during the past three trading sessions. Over 2 million shares traded on Wednesday (an up day), and on Friday over 1.77 million shares changed hands. The average three-month trading activity is around 1.35 million shares, so as you can see, the stock is seeing strong volume flows as we near a potential breakout.
If Deckers does manage to break out soon, then it will be a significant move because the stock will be trading at brand new all-time highs. You can play DECK by buying any future breakout with a tight stop maybe a point or two below your entry point. I like the risk/reward here because the stock could easily print well over $100 a share if the trend continues.
This is another cash-rich company, with around $445.23 million of cash on its balance sheet and zero debt. It’s also a heavily shorted stock, with the current short interest as a percentage of the float at 10.8%. The bears have also been increasing their bets from the last reporting period by around 6.3%, or about 237,000 shares. The “house of pain” could be in the cards for the traders betting against this stock if this breakout is the real deal.
Buffalo Wild Wings
One final stock that has already started to break out is Buffalo Wild Wings (BWLD), an owner, operator, and franchisor of restaurants featuring a variety of menu items, including its Buffalo-style chicken wings spun in any of its 14 signature sauces. This stock is off to a hot start in 2011, with shares already up 35%.
If you take a look at the chart for Buffalo Wild Wings, you’ll see that this stock is just staring to break out and trade above some past overhead resistance at around $57.68 a share. This move is coming on strong volume that registered 531,000 shares, which is easily above the three-month average activity of 402,000 shares. Friday’s volume is a follow-through from Thursday’s big volume (also an up day) of 562,000 shares. This is bullish action because the stock now has officially moved into all-time high territory.
This is another heavily shorted stock, with the current short interest as a percentage of the float standing at around 9.7%. Anyone who is short this now is simply trend-fighting since shares are officially printing brand new all-time highs. I think this stock eventually hits $100 a share, so look to buy this on any weakness with a tight mental stop.
Buffalo Wild Wings is one of TheStreet Ratings’ top-rated restaurant and hotel stocks.
To see more breakout candidates, including Chipotle Mexican Grill (CMG), Parker Drilling (PKD) and Odyssey Marine Exploration (OMEX), 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.
Please note that due to factors including low market capitalization and/or insufficient public float, we consider MCZ and VNDA to be small-cap stocks. You should be aware that such stocks are subject to more risk than stocks of larger companies, including greater volatility, lower liquidity and less publicly available information, and that postings such as this one can have an effect on their stock prices.