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- 5 Mega-Cap Stocks to Trade for Gains
- 3 Big-Volume Stocks to Trade for Breakouts
5 Stocks Setting Up to Break Out - 16311 views
WINDERMERE, Fla. (Stockpickr) -- U.S. stocks are ripping to the upside today, pushing the S&P 500 toward its biggest gain in over a month, after leaders in France and Germany announced plans to support European banks and get the region’s debt crisis under control in three weeks.
German Chancellor Angela Merkel and French President Nicolas Sarkozy said yesterday that they will introduce a “comprehensive package” to recapitalize European banks and address the Greek debt crisis by the Nov. 3 Group of 20 summit. The bulls love this news, and it’s clear that the bears have been forced to do some big short-covering, which has helped to gap the overall market significantly higher. Almost every single sector is trading to the upside, and many stocks are making massive spikes higher.
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For example, Coffee Holding (JVA), a stock I highlighted on last Thursday in "5 Stocks Under $10 With Big Upside Potential," has soared over 16% today. I am pointing this move out specifically to show how much a heavily shorted stock can spike in this kind of environment.
At last check, the Dow Jones Industrial Average was up over 270 points while the S&P 500 had added over 30 points. The tech-heavy Nasdaq was soaring by a whopping 75 points.
The top traders in the world know that markets are made up of thousands of stocks in different sectors. With so many moving parts, there’s always some sector or stock that’s acting strong and 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 are setting up to break out and trade higher from current levels.
One stock that’s already starting to break out is Collective Brands (PSS), which is engaged in the wholesale and retail of footwear and related accessories worldwide. This stock has been hammered by the bears so far in 2011, with shares off by around 30%.
If you take a look at the chart for Collective Brands, you’ll notice that this stock has been stuck in a sideways trading pattern for the last month, between $12 a share on the lower end and $14.41 on the higher end. Now the stock is starting to break out above $14.41 a share, which could be signaling that a much bigger move higher is coming. The next major overhead resistance levels that traders should keep an eye on are at $15.40 to $16 a share. If this breakout holds, and then the stock takes out those levels, it could then make a run at filling the May gap down in price that started at around $19 a share.
You could buy this stock off any weakness and anticipate the move into the May gap down. You could simply place a mental stop just below $13.50 in case this is a false breakout. You could also just wait until $15.40 to $16 a share is taken out to the upside and buy off that strength. Look for a strong volume move above those levels that’s tracking in close to or above its three-month average action of 2.2 million shares.
This is a heavily shorted stock, with over 32% of the tradable float sold short by the bears. If we see a breakout in PSS soon, then look for this big short interest to play a part in pushing this stock significantly higher from current levels.
Another hot stock that looks poised to break out soon is Meritor (MTOR), a global supplier of drivetrain, mobility, braking and aftermarket solutions for commercial vehicle and industrial markets. Thos stock has been destroyed so far in 2011, with shares off by over 57%.
If you take a look at the chart for Meritor, you’ll notice that this stock has been crushed from its July high of $17.33 a share to a recent low of $6 a share. Since that massive fall, the stock has started to form a sideways trading pattern between $6 a share on the lower end and $9.50 a share on the higher end. The stock now looks ready to breakout above some past overhead resistance at around $9.04 to $9.56 a share. A sustained move above those levels should set this stock up for a huge move that could tap $12 to $15.17 a share (the 200-day moving average).
You could be a buyer of this stock off any weakness and simply use a mental stop just below its 50-day moving average of $8.15 a share. I would then add to any long position once the stock takes out $9.56 with strong volume. Look for volume that’s tracking in close to or above its three-month average action of 2.3 million shares.
Keep in mind that this stock is heavily shorted with over 11.3% of the tradable float sold short by the bears. It’s worth mentioning that the short-sellers have been increasing their bets from the last reporting period by 5.3%, or by about 508,000 shares. This high short interest could easily spark a massive short-squeeze if MTOR can take out that key $9.56 area in the near future.
Meritor is one of the top holdings at Glenview Capital Management.
One name in the biotech complex that’s quickly approaching a major breakout is Questcor Pharmaceuticals (QCOR), a specialty pharmaceutical company focused on providing prescription drugs for central nervous system disorders. This is a market-leading stock, with shares up over 120% so far this year.
If you take a look at the chart for Questcor, you’ll notice that this stock has been in a very bullish uptrend for the past six months, with shares making mostly higher lows and higher highs. The stock is now approaching a major breakout if the stock can manage to trade above some past overhead resistance at around $31.41 to $32.78 a share.
Already during intraday trading today, the stock tagged $33.08 a share. Market players should now watch for a closing price near today’s highs for a signal that a much larger move higher could be in the cards for QCOR. '
Traders should look for a high volume move above $32.78 to $33.08 a share. Look for volume that’s tracking in close to or above its three-month average action of 1.35 million shares. A move above those levels with volume could set this stock up to soar since it would move the stock into all-time high territory. This will basically mean that just about anyone who has bought the stock is making money. It also means just about anyone who has shorted it is losing money.
One way to trade this is to simply wait for the breakout and buy the stock if volume is looking strong and the stock sustains a move above the breakout levels. You could use a stop that sits just below $31.41 a share in case it’s a false breakout. You could also buy on weakness and then add to the position once the breakout triggers. Again, use a tight stop in case the stock isn’t ready to print new highs.
It’s worth mentioning that the short interest as a percentage of the float for QCOR sits at around 8%. That’s more than enough short-sellers to spark a big spike higher if we do get a high volume breakout in the coming days or weeks. Keep this name on your trading radar.
One name in the oil and gas complex that could be setting up for a big breakout is Rex Energy (REXX), an independent energy company engaged in the acquisition, production, exploration and development of oil and gas, with properties concentrated in the Appalachian and Illinois regions. This stock hasn’t done much in 2011, with shares off by around 5%.
If you look at the chart for Rex Energy, you’ll notice that this stock has been printing higher lows since the stock bottomed at around $9.70 a share back in June. Whenever a stock consistently makes higher lows, it shows that large traders are eager to jump into the stock on any dip. That’s bullish action, and it often means that the stock is setting up to trend much higher, which is exactly what we have today with REXX up over 13% at last check.
This strong action in the stock has now pushed shares above the 50-day moving average of $12.40 a share and above some big overhead resistance at around $12.08 a share. If this move can be sustained on a closing basis, then this stock could easily be setting up to trade back towards its 52-week high of $15.64 a share or possibly even higher. Traders should continue to monitor the volume which so far today has traded over 430,000 shares, which is below its three-month average action of 1.04 million shares. It would be bullish to see the volume get closer to that three-month average by the close of trading today.
I would now look to buy this stock off any weakness back towards its 50-day moving average of $12.41 a share. One could simply use a mental stop just below its 200-day moving average of $11.90 a share, or right around $12.08 a share. I would look to add to any long position if $15.64 is taken out to the upside with strong volume. A move above that level will mean this stock has zero resistance until it gets back above $20 a share.
This is another name that the short-sellers are heavily involved in, since 35.6% of the tradable float for this stock is currently sold short by the bears. This huge short interest could fuel some big spikes higher in the near future, since the stock is starting to shape up technically. That makes it worth putting on your watchlist for the coming days and weeks.
One final stock that looks ready to trigger a big breakout is Blue Nile (NILE), an online retailer of high quality diamonds and fine jewelry. This stock has been slammed by the bears so far in 2011, with shares off by around 30%.
If you look at the chart for Blue Nile, you’ll notice that this stock has dropped from its July highs of $48.55 a share to a recent low of $30.32 a share. After that massive drop, the stock has started to trade sideways during the past two months between $32.50 on the lower end and $39 on the higher end. The stock now looks ready to break out and trade above some past overhead resistance at around $39.17 to $40 a share.
Market players should look for a strong volume move above those levels to trigger the potential of huge spike higher. The stock really has little overhead resistance until $45 a share and then the 200-day moving average of $48 a share once those breakout levels are taken out.
One could simply be a buyer off of any strength that spikes the stock above $39.17 to $40 a share with strong volume. Look for volume that’s tracking in close to or above its three-month average action of 261,000 shares. You could buy on weakness with a tight mental stop a few percentage points below your entry, and anticipate the breakout.
This is yet another extremely shorted stock with over 28% of the tradable float sold short by the bears. This huge short interest is going to be the fuel that to a massive short-squeeze if the stock takes out the breakout levels I mentioned above. Keep this name on your trading radar.
Blue Nile is one of TheStreet Ratings' top-rated Internet catalog and retail stocks.
-- 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.