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5 Stocks Setting Up to Break Out - 26386 views
WINDERMERE, Fla. (Stockpickr) -- U.S. stocks are soaring today as signs of stabilization in Europe and better-than-expected consumer sentiment are sparking big buying among investors.
Stocks pushed into daily highs after consumer sentiment data showed a bullish reading. The preliminary Thomson Reuters/University of Michigan consumer sentiment index for November came in at 64.2, which was well above the 60.9 reading in October.
At last check, the market was reacting very bullishly to the news, with the Dow Jones Industrial Average up over 260 points and the S&P 500 up over 20 points. The tech-heavy Nasdaq was surging by over 50 points. Stocks are also pushing higher today as large traders chase performance as we enter a seasonally bullish time for equity prices.
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If the markets can continue to uptrend in the face of bearish news, then we’re going to see a ton of stocks break out and trend significantly higher. 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 breaking out.
Trading breakouts is not a new game on Wall Street. This strategy has been mastered by legendary traders such as William O’Neal, Stan Weinstein and Nicolas Darvas. These pros know that once a stock starts to break out above past resistance levels and hold above those breakout prices, then it can easily trend significantly higher.
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 started to break out is Cisco Systems (CSCO), which designs, manufactures and sells IP-based networking and other products related to the communications and IT industry and provides services associated with these products and their use. This stock has not done much in 2011, with shares off by around 5%.
If you take a look at the chart for Cisco Systems, you’ll notice that this stock has actually been uptrending for the past three months after it found some big buying support at $14.84 to $14.95 a share. After finding that buying support, the stock has been ramping and is now triggering a big breakout with shares moving above $18.60 a share on high volume. Volume on Thursday (an up day) registered about 148 million shares, which is well above the average volume.
Market players should now watch for this stock to sustain a move and close above the next major resistance level at $19.50 a share. A move above that level will set this stock up to start filing a major gap down in price that occurred back in February. That could easily push shares of CSCO back into the $20s.
One could be a buyer of this stock off any weakness and simply place a mental stop a few percentage points below the breakout price of $18.60. I would look to add aggressively to any long position once the stock moves above $19.50 with volume. Look for volume that’s tracking in close to or above its three-month average action of 66,743,600 shares. A high-volume move over $19.50 should put that gap down into play and spark a solid rally for CSCO, so watch that level closely in the coming days and weeks.
Pacific Sunwear of California
Another stock that’s very close to triggering a major breakout is Pacific Sunwear of California (PSUN), a specialty retailer rooted in the action sports, fashion and music influences of the California lifestyle. The bears have done a number on this stock in 2011, with shares off by over 75%.
If you take a look at the chart for Pacific Sunwear, you’ll see that this stock was hammered from its July high of $3.16 to a recent low of $1.11 a share. After printing that low, the stock has started to change its trend to a more bullish slant since its higher lows and higher highs. Shares have also started to move back above its 50-day moving average of $1.31, which is another bullish technical sign. Now the stock is approaching a major breakout if it can manage to sustain a move and close above $1.34 to $1.35 on high volume.
Market players should look for a move and close over $1.35 on volume that registers close to or above its three-month average action of 831,851 shares. The stock is trading up a bit today and volume is already trending above that average volume. Keep an eye on this trend to see if it continues if the stock breaks out in the near future.
You could be a buyer of this stock once it takes out $1.35 and simply use a mental stop a few percentage points below that level. If this stock does trigger that breakout, then I would look for a monster run above some more resistance at $1.60 to $1.68. A move above those levels will put a big gap down into play that could easily push this stock into the low-to-mid-$2s.
Pacific Sunwear is a heavily shorted stock, since the current short interest as a percentage of the float stands at 14.4%. This high short interest is why I like the odds of a large percentage move if we see a high-volume breakout soon.
One name in the biotechnology and drug complex that’s just starting to break out is S3Bio (SSRX), a fully integrated biotechnology company focused on researching, developing, manufacturing and marketing biopharmaceutical products primarily in China. This stock has been trending lower in 2011, with shares off by around 17%.
This stock is surging over 8% today after the company beat by a penny, beat on revenues and reaffirmed its 2011 revenue guidance.
If you take a look at the chart for S3Bio, you’ll notice that this stock was crushed from its July high of $19 a share to a recent low of $10 a share hit in October. After hitting that low, the stock has started to uptrend and print higher lows and higher highs, which is bullish price action. The stock now is setting up to trigger a big breakout if it can sustain a move and closes above some past overhead resistance at $12.51 a share on strong volume.
Market players should look a move and close over $12.51 and today’s high of $12.63 on volume that’s tracking in close to or above its three-month average action of 64,469 shares. Volume today is already hitting above that level, so watch how the stock closes to see if the breakout triggers as well.
You could be a buyer of this stock off any weakness and simply anticipate the breakout. Use a tight mental stop at around the 50-day moving average of $11.92 a share. A better strategy would be to buy off strength and get long once it closes over $12.51 with volume. If we get that close, then look for this stock to spike big back towards its 200-day moving average of $15.26 a share, or possibly even higher.
A stock in the computer services sector that looks poised to break out is Ubiquiti Networks (UBNT), which designs, manufactures and sells broadband wireless solutions worldwide. This stock is off to a hot start since it IPO'd back in October, with shares up by around 7%.
This stock is popping over 7% today after the company reported profits that nearly tripled in the first quarter following their introduction of its AirVision IP video surveillance platform, its third product.
If you look at the chart for Ubiquiti Networks, you’ll notice that this stock started trading on Oct. 17 at around $17 a share. Since the IPO debut, the stock soared and hit an all-time high of $21.50 a share. After hitting that high, the stock dropped back down to $18.50 but has now rallied back to its current price of just under $20 a share.
Traders should put this IPO on their trading radar for a breakout trade in the near-term if it can manage to move back above that all-time high of $21.50 on high volume. Look for a volume move over that level that tracks in close to or above its average action of 292,660 shares. The stock actually hit $21.50 today but failed to move higher.
Once could simply be a buyer of this stock once it sustains a move and close over $21.50. I would simply use a very tight mental stop at around $21.20 or even $21 in case the breakout fails. If this breakout does indeed hold, then I would look for a monster spike since it would mean the stock is trading at new all-time highs and just about everyone who has bought or owned is making money.
One more stock that’s approaching a major breakout is Velti (VELT), a global provider of mobile marketing and advertising solutions that enable brands, advertising agencies, mobile operators and media companies to implement campaigns by communicating with and engaging consumers through their mobile devices. The bears have hammered this stock in 2011, with shares off by over 40%.
If you look at the chart for Velti, you’ll notice this stock plunged huge from its July high of $20 a share to a recent low of $6.11. Since hitting that low, the stock has rebounded back above its 50-day moving average of $7.81 a share, and it’s now setting up to trigger a major breakout.
Market players should watch for a high-volume move above some near-term overhead resistance at $8.74 to $8.85 a share, and then $9.25 a share. If this stock busts above those tough resistance levels with volume, then look for a monster spike towards its 200-day moving average of $12.93, or possibly even higher.
I would look to buy this stock once it starts moving above all three of those levels on volume that’s tracking in close to or above its three-month average action of 634,283 shares. I would use a tight mental stop just below the 50-day moving average in case the stock isn’t ready to swing higher.
Keep in mind that VELT reports earnings on next Tuesday, so look to play the breakout after you know the quarter is a good one and the stock is reacting positive. That said, you can scalp the stock ahead of the quarter for some quick gains while we wait for the report.
-- 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.