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5 Stocks Setting Up to Break Out - 16191 views
WINDERMERE, Fla. (Stockpickr) -- U.S. stocks are soaring today and following through from Friday’s strength after reports surfaced from The Wall Street Journal that the Federal Reserve is considering a scheme to buy more mortgage bonds, with the aim of lowering rates to get the housing market going again.
At last check, the Dow Jones Industrial Average was up over 80 points while the S&P 500 has jumped over 10 points. The tech-heavy Nasdaq has also adding over 34 points as Wall Street continues to move through the thick of earning season.
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If the Fed does indeed embark on more quantitative easing, then we could easily see much higher stock prices from current levels for the U.S. equity markets. In fact, all of the U.S. indices are now trading in breakout territory, since the Dow has traded over past resistance at 11,716.94, the S&P has crossed over resistance at 1233.10, and the Nasdaq has taken out resistance at 2667.85.
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 breakout. 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 Steel Dynamics (STLD), a steel producer and metals recycler in the U.S. This stock has been hammered so far in 2011, with shares off by over 30%.
If you take a look at the chart for Steel Dynamics, you’ll notice that this stock formed a double top in July at $16.40 a share. After forming that double-top chart pattern, the stock then dropped huge down to a recent low of $8.78 a share. Since that low, the stock has started to rebound sharply toward its current level of around $12.50 a share. This stock now is setting up to trigger a number of key breakouts.
Market players should notice that STLD has started to break out above some past overhead head resistance at its 50-day moving average of $11.38 to $11.50 a share on gigantic volume. Volume on Thursday registered 9.2 million shares, and on Friday it hit 4.8 million (both up days), which is well above its three-month average action of 4 million shares. This now sets the stock up to challenge some more overhead resistance at around $12.50 to $13 a share.
One could be a buyer of this stock off any weakness and anticipate the next breakout above $12.50 to $13 a share. You could simply use a mental stop just below the 50-day moving average of $11.38 a share in case the stock isn’t ready to challenge those resistance levels. One could also just buy this stock off strength and get long once it takes out $13 a share with strong volume. I would target a run back towards the 200-day moving average of $15.69 if this stock is ready to rip higher form current levels.
Steel Dynamis is one of the top-yielding metals and mining stocks.
Another stock that is worth watching for a breakout is AuthenTec (AUTH), a provider of security, identity management and touch control technologies for personal computer, wireless device and information technology markets. This stock is trending hot in 2011, with shares up over 60%.
If you take a look at the chart for AuthenTec, you’ll notice that this stock has been uptrending strong for the past couple of months after buyers stepped in big to support it near $2.15 to $2.33 a share. This stock has been making higher highs and higher lows as it has trended from $2.15 to its current price of around $4 a share, which is bullish. This bullish action now sets up AUTH for a big breakout and volume is tracking in very strong. Four recent upside volume days have registered north of 700,000 shares, which is well above its three-month average volume of 257,000 shares.
Market players should now watch for this stock to trade and close above some major overhead resistance at around $4.16 a share with strong volume. A high-volume move above that level will push this stock into breakout territory and will trigger a new 52-week high. The next overhead resistance levels after that don’t really come into play until $6 a share and higher.
One could be a buyer of this stock off any weakness and simply use a mental stop near $3.50 a share and anticipate the breakout. Or you could buy off strength and get long once you see a big volume move over $4.16 trigger. Simply use a mental stop a few percentage points below $4.16 if you get long once the breakout hits.
One breakout play in the basic materials complex is Owens Illinois (OI), a manufacturer of glass containers with 81 glass manufacturing plants in 21 countries. This stock has been beaten down in 2011, with shares off by over 35%.
If you take a look at the chart for Owens-Illinois, you’ll notice that this stock was hammered down by the bears from its July high of $27.07 to a recent low of $13.43 a share. After hitting that low in early October, the stock has rebounded sharply to its current price of around $19.50 a share.
The stock now is quickly approaching a major breakout if it can manage to trade above some past overhead resistance at around $18.84 to $19.68 a share on solid volume. A high-volume move above those levels should set this stock up to make a run back towards some resistance at $24 a share or to its 200-day moving average of $25.96 a share.
You could be a buyer of this stock off any noticeable weakness and anticipate the breakout, or you could just buy off strength once the breakout triggers. If you buy of weakness, simply place a stop just below the 50-day moving average of $17.25 a share. If you buy off strength, get long once $18.84 to $19.68 are challenged and taken out, and simple place a stop just below $18.84 a share.
Another stock that looks ready flash a big breakout is CNinsure (CISG), an independent insurance intermediary company operating in China. The bears have destroyed this stock in 2011, with shares off by over 55%.
If you look at the chart for CNinsure, you’ll notice this stock has been crushed lower by the bears from its July high of $15.92 a share to its current price of around $7.20 a share. The stock hit a low of around $5.80 to $5.90 a share in early October and has since then rebounded to its current levels. This stock is now triggering a breakout trade since shares have started to move above some big overhead resistance at $7 a share.
Traders should watch to see how the stock closes today and if large volume flows in that’s well above its three-month average action of 524,700 shares. A sustained move above $7 a share should set this stock up to make a run at its 50-day moving average of $8.80 a share or possibly much higher.
One could simply be a buyer of this stock off any slight weakness now that it’s started to take out $7 a share. I would simply use a mental stop just below $7 a share in case this breakout isn’t the real deal.
It’s worth mention that the current short interest as a percentage of the float for CISG is very large at just over 21%. This is a very large short interest on a stock with a tradable float of only 28.25 million shares. Now that this stock has started to move above that big overhead resistance at $7, look for a big short squeeze if the stock continues to push higher.
One name in the regional bank complex that has started to break out is Fulton Financial (FULT), a multi-bank holding company that offers retail and commercial banking products and services in Pennsylvania, Delaware, Maryland, New Jersey and Virginia. This stock is off to a slow start in 2011, with shares off by around 6%.
Last week, Fulton said its third-quarter earnings jumped 25% as credit rends improved, and the company set aside less money to cover bad loans.
If you look at the chart for Fulton Finanical, you’ll notice that this stock has just started to break out above some past overhead resistance at $9.30 a share on monster volume. Volume on Thursday registered 5.2 million and on Friday 10.3 million (both up days), which is well above its three-month average action of 1.6 million shares. Now the stock just needs to take out its 200-day moving average of $10.06 a share to trigger its next bullish technical signal.
If you’re looking to buy this stock, you could simply get long on any noticeable weakness. I would place a mental stop a few percentage points below $9.30 a share in case this breakout fails. I would then add aggressively to any long position once the stock takes out $10.06 with solid volume. Target a run back towards its 52-week high of $11.91 or possibly even higher if this breakout is the real deal.
-- 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.