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5 Stocks Setting Up to Break Out - views
WINDERMERE, Fla. (Stockpickr) -- U.S. stocks are trending slightly lower today after official government data showed that the U.S. economy grew more slowly than originally expected in the third quarter. That slower growth was mostly due to corporations drawing down their inventories faster than expected.
Gross domestic product was revised lower to an annual rate of 2% in the third quarter from a previous estimate of 2.5%, according to the commerce department. Although this number is below most economists’ estimates, it’s still better than the second quarter’s anemic growth of just 1.3%.
At last check, the Dow Jones Industrial Average was trading down 40 points and the S&P 500 was off by 3 points. The tech-heavy Nasdaq was sliding lower by 6 points.
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If large institutional traders decide to use the recent weakness in equities as a buying opportunity for an end-of-the-year rally, then a number of stocks are going to 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 potentially trade higher from current levels.
One stock that’s setting up beautifully for a big breakout is Cheniere Energy (LNG), an energy company primarily engaged in LNG-related businesses. This stock has been a market leading performer in 2011, with shares up a whopping 110%.
If you take a look at the chart for Cheniere Energy, you’ll notice that for the past month this stock has been setting up a solid basing pattern at around $10 a share, after the stock gapped up on huge volume through its 50-day and 200-day moving averages. Now this stock has triggered a breakout intraday after it moved above some past overhead resistance level at $12.56 and hit a daily high of $12.86. So far this breakout has failed, and the stock has traded back to near $11.50.
Market players should now watch for this stock to sustain a move and close back above $12.56 and the daily high of $12.86 on high volume. Volume so far today has registered 7.8 million shares, which is well above the three-month average daily action of 3.8 million shares. That said, if the stock closes down and near the lows of the day, it should be considered bearish short-term with that much volume.
Basically, I would play this stock from the long side in two ways from here. One way would be to buy the stock near that base at $10 a share if we close on the lows. I would simply use a mental stop just a few percentage points below that level. Or you could buy off strength on the re-test of the breakout over $12.56 and $12.86 on high volume. Use a mental stop a few percentage points below $12.56 if we get that breakout again.
It’s worth pointing out that LNG is a heavily shorted equity. The current short interest as a percentage of the float for LNG is a very high 22.3%. The short-sellers have also been increasing their bets from the last reporting period by 9.1%, or by about 1.46 million shares. Any future sustained breakout for LNG could lead to a monster pop since this stock is so heavily shorted.
Another stock that’s setting up for a big breakout is Toreador Resources (TRGL), an independent energy company engaged in the exploration and production of crude oil with interests in developed and undeveloped oil properties in the Paris Basin, France. The sellers have destroyed this stock in 2011, with shares off by over 75%.
If you take a look at the chart for Toreador Resources, you’ll see that this stock was beaten down from its July high of $4.31 a share to a recent low of $2.62. Since printing that low, this stock has been uptrending strong and making mostly higher lows and higher highs. Now the stock is trading within range of a big breakout if it can manage to move above two key overhead resistance levels.
Traders should watch for a sustained move and close above $4.19 to $4.31 a share on high volume to trigger a breakout trade. Look for volume that’s tracking in close to or above its three-month average action of 139,111 shares. If we get that high-volume breakout, then look for this stock to make a monster spike back towards its 200-day moving average of $5.98.
You could be a buyer of this stock off any weakness back toward the 50-day moving average of $3.24. I would use a mental stop just below that level if you buy off weakness. You could also buy off strength and get long once $4.19 to $4.31 are taken out with volume to the upside. Simply use a mental stop a few percentage points below $4.19 if you buy off strength.
I also included Toreador in a recent list of Stocks Under $10 Setting Up to Trade Higher.
Sirius XM Radio
One stock in the broadcasting complex that’s setting up for a big breakout is Sirius XM Radio (SIRI), which is engaged in broadcasting music, sports, news, talk, entertainment, traffic and weather channels in the U.S. on a subscription fee basis through its two satellite radio systems. This stock has put in a decent performance so far in 2011, with shares up over 13%.
If you look at the chart for Sirius XM Radio, you’ll notice this stock was hit by the sellers from its July high of $2.35 to a recent low of $1.27 hit in October. Since tapping that low, the stock has rebounded sharply and now trades just below its 200-day moving average of $1.88 and above its 50-day moving average of $1.71. Shares of SIRI now are starting to setup for a big breakout if the stock can manage to move above some key overhead resistance levels.
Market players should watch for a high-volume breakout above some near-term overhead resistance areas at $1.86 to $1.89, and then over $1.95 a share. Traders should watch for any breakout over those levels on volume that’s near or well above its three-month average action of 74,719,700 shares. If we get that action, then look for this stock to re-test some move overhead resistance at $2.22 to $2.35 a share, or possibly trend much higher.
If you’re bullish on this stock, then you could be a buyer off any weakness toward the 50-day at $1.71. Simply use a tight mental stop near $1.60 in case the stock isn’t ready to break out just yet. You could also buy off strength and get long once it takes out $1.89 with volume. Add to any long position once it moves over $1.95 with volume. Use a tight mental stop just below the 200-day at $1.88 if you buy off strength.
Keep in mind that the current short interest as a percentage of the float for Sirius is rather high at 7%. The short-sellers have also been increasing their bets from the last reporting period by 9.8%, or by about 24.67 million shares. This stock could easily see a monster short-squeeze if that breakout triggers soon, so keep this name on your trading radar.
One stock in the computer storage complex that’s close to triggering a breakout is Hi-Tech Pharmacal (HITK), a specialty manufacturer and marketer of prescription, over-the-counter and nutritional products. This stock has been a big winner so far in 2011, with shares up over 55%.
If you look at the chart for Hi-Tech Pharmacal, you’ll notice that this stock has been in a monster uptrend with shares making higher lows and higher highs since it printed $23.72 in early August. Whenever a stock shows price action like this with higher lows and highs, then it demonstrates that large institutional traders are paying up to own shares. This simply means that the stock is in high demand on Wall Street.
This bullish trend and price action for HITK now sets the stock up for a big breakout. In fact, at last check the stock has already started to trigger this breakout in intraday trading. Shares of HITK have started to move above some past overhead resistance at $38.33, with the stock currently trading at $39.15.
Market players should now watch for a sustained move and close on high-volume above $38.33 to signal that HITK wants to trend much higher. Look for a volume at today’s close that registers close to or well above its three-month average action of 189,380 shares. If we get that action, then this will move HITK into all-time high territory, and it should set up the stock for much higher prices.
If you’re bullish on this stock, look to be a buyer off any weakness not that it’s started to break out, and simply use a mental stop a few percentage points below $37.22 to $38.33. You could also let the stock consolidate some of the recent gains and buy it off the next solid base as long as the pattern of higher lows isn’t broken on high-volume.
It’s worth pointing out that this stock has a very high short interest, since over 14% of the tradable float is currently sold short by the bears. This breakout that has triggered today has to be making anyone short this stock nervous. It’s rarely a great idea to be short a stock making new all-time highs. That said, if this breakout holds, look for a big spike higher soon as the shorts capitulate on some of their bets.
One more stock that’s quickly approaching a major breakout is Solazyme (SZYM), whose technology transforms a range of plant-based sugars into oils. Its renewable products can replace or enhance oils derived from the world’s three existing sources-petroleum, plants and animal fats. The sellers have done a pretty good number on this stock; shares are off by over 40% so far in 2011.
If you look at the chart for Solazyme, you’ll notice this stock was hammered from its July high of $27.47 to an October low of $7.86. After hitting that low, the stock has started to rebound nicely with shares currently trading just over $12 a share. That big rebound now sets up SZYM for a big breakout if the stock can manage to clear two key overhead resistance levels.
Market players should watch for a high-volume move above some near-term overhead resistance at $13.47 a share, and then $13.75 a share. Watch for volume to track in close to or well above its three-month average action of 370,094 shares on any future breakout. If we get that high-volume breakout, then this stock could easily explode back toward $18 a share or possibly even higher.
You could anticipate the breakout and buy this stock off any weakness with a mental stop just below some near-term support at $11 a share. Or you could buy it off of strength and get long off a high-volume move over $13.47 to $13.75. Use a mental stop a few percentage points below the breakout level if you buy off strength. Look for a sustained move during which the stock closes over those key resistance levels to confirm that SZYM wants to trend much higher.
-- 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.