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5 Stocks Setting Up to Break Out - views
BALTIMORE (Stockpickr) -- U.S. stocks are trading nicely to the upside today after a big drop in the jobless rate spurred buying among bullish investors and short-covering among bearish market players.
The U.S. economy added 120,000 jobs in November, and the unemployment rate dropped to 8.6%, its lowest level in more than two and a half years, according to the Labor Department. Some market observers were attributing the drop to a pickup in hiring among private employers. That said, the number of new jobs created still fell well short of what economists say is needed to drive down our jobless rate, which is 250,000 jobs a month. We need that many jobs on average to get our unemployment rate back towards its pre-recession level near 6%.
At last check, the Dow Jones Industrial Average was trading up 25 points, and the S&P 500 had added 4 points. The tech-heavy Nasdaq was tacking on 8 points.
If the bulls continue to control this market, then we’re going to see yet another end-of-the-year market rally. If we get that action, then you can expect to see a number of stocks and sectors breakout 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 for a big breakout is cancer therapeutics player Aveo Pharmaceuticals (AVEO), which focuses on discovering, developing and commercializing targeted cancer therapies to impact patients’ lives. This stock has done okay in 2011 with shares up about 16%.
If you take a look at the chart for Aveo Pharmaceuticals, you’ll notice that this stock has been trading range bound between $14 and $17.21 a share for the past four months. This sideways action has now created a big base for the stock to either launch off of, or fail to breakout. Since the stock is flirting with taking at that range high at $17.21, the odds for now favor a breakout.
Market players should now watch for this stock to sustain a high-volume move and close above $17.21 a share. Traders should look for volume on any move over $17.21 that’s close to or greater than its three-month average action of 213,463 shares. If we get that high-volume breakout, then look for this stock to spike significantly higher back towards $20 to $22 a share.
One could be a buyer of this stock off any weakness and simply anticipate the breakout. I would simply use a mental stop right underneath its 200-day moving average of $16.46. You could also just buy off strength and get long once $17.21 is taken out with high-volume. Use a mental stop a few percentage points below $17.21 if we get that breakout in the coming days or weeks.
It’s worth pointing out that Aveo Pharmaceuticals has a decent short interest. The current short interest as a percentage of the float for Aveo stands at 7.6%. The bears have also been increasing their bets from the last reporting period by 5.2%, or by about 120,480 shares. I expect a big short-squeeze to kick off if Aveo breaks out soon, so keep this name on your trading radar.
Aveo is one of the top holdings of Seth Klarman's Baupost Group.
Another stock that’s just starting to break out is craft brewer Boston Beer (SAM), which produces malt beverages and hard cider products at the company-owned breweries and under contract arrangements at other brewery locations. This stock is up modestly in 2011, with shares returning about 7.6%.
If you take a look at the chart for Boston Beer, you’ll notice that this stock has been uptrending big since it hit a recent low at $71 a share. During that uptrend, the stock has been consistently making higher highs and higher lows, which is bullish price action for any stock. Now shares of Boston Beer are starting to break out above some past overhead resistance at $100 a share. The stock is currently trading at around $104 a share and volume at last check was 32,000 shares.
Traders should now watch to see if this stock can close above $100 on high-volume. Look for volume that’s tracking in close to or above its three-month average action of 118,054 shares. If we get that high-volume close over $100, then look for this stock to make a run at $120 a share in the coming weeks.
One could be a buyer of this stock off any noticeable weakness back towards $103 to $101 a share. I would simply use a mental stop just below the $100 breakout level, in case this ends up being a failed breakout.
This stock is heavily shorted by the bears. The current short interest as a percentage of the float for Boston Beer is 18.4%. This high short interest could easily spark a huge spike higher as the bears start to capitulate on their losing trade. I call this a losing trade because SAM is now trading at all-time highs. This means that just about anyone who has shorted the stock is losing money. (Boston Beer was also featured recently in "5 Sin Stocks That Could Pop on a Short Squeeze.")
One stock in the medical equipment and supplies complex that’s setting up for a big breakout is Quidel (QDEL), which is engaged in the development, manufacturing and marketing of diagnostic testing solutions. This stock has put in a decent performance so far in 2011, with shares up over 24%. .
If you look at the chart for Quidel, you’ll notice this stock has been uptrending very strong since it hit a recent low of $12.35 in August. During that uptrend, the stock has been printing higher highs and higher lows, which demonstrates that large traders are paying up each time they accumulate the stock. This simply shows that the stock is in very high demand among large institutional traders. That big uptrend has now setup QDEL for a major breakout if it can manage to clear a couple of overhead resistance levels
Market players should watch for a high-volume breakout above $18.49 to $19.09 a share. Traders should look for a sustained move and close above those levels with volume that’s close to or well above its three-month average action of 157,610 shares. Volume is already looking very strong today with over 330,000 shares traded at midday with shares up 2.5% to $18.
If you’re bullish on this stock, then one could be a buyer off any weakness and simply use a mental stop at around $17.50 a share. You could also buy off strength and get long once it takes out $18.49 to $19.09 with volume. If you buy off strength, then just use a mental stop a few percentage points below $19.09.
This is another stock that’s nearing a big breakout that also has an extremely high short interest. The current short interest as a percentage of the float for QDEL is very high at 17.9%. I expect this stock to spike significantly higher off any high-volume breakout since the stock is so heavily shorted.
Quidel also shows up on Scott Rothbort's list of Santa Claus Rally Stocks as a short-squeeze play.
Hudson City Bancorp
One stock in the beaten-down banking sector that’s close to triggering a breakout trade is Hudson City Bancorp (HCBK), a community- and consumer-oriented retail savings bank offering deposit products, residential real estate mortgage loans and consumer loans. This stock has been destroyed by the sellers in 2011, with shares off by around 54% -- it's one of the 10 Worst-Perofrming S&P 500 Stocks of the Year.
If you look at the chart for Hudson City Bancorp, you’ll notice that this stock has been trading within range between $6.50 and 5.07 a share for the last four months. The stock recently formed a double bottom at $5.07 to $5.09, which is the low end of the range, and has since then started to rally to its current price of $5.85. This recent rally now sets the stock up for a breakout trade if it can manage to move above some past overhead resistance levels.
Market players should now watch for a sustained move and close on high-volume above $5.94 and then $6.24 to $6.40 a share to signal that HCBK wants to trend much higher. Look for a volume any move above those levels that registers close to or above its three-month average action of 5,924,340 shares. If we get that action, then I expect HCBK to start a major bounce back towards its 200-day moving average of $7.59, or possibly even higher.
If you’re bullish on this stock, look to be a buyer off any weakness, and simply use a mental stop just below its 50-day moving average of $5.67 a share. You can also buy off strength and get long once $5.94 is taken out to the upside with volume. I would then add to any long positions once $6.24 and then $6.40 are taken out with volume.
U.S. Auto Parts Network
One final stock that’s quickly approaching a big breakout is U.S. Auto Parts Network (PRTS). This company is an online provider of aftermarket auto parts, including body parts, engine parts, performance parts and accessories. This stock has struggled so far in 2011, with shares off by around 47%.
If you look at the chart for U.S. Auto Parts Network, you’ll see that this stock just sold off on big volume from $5 to a low of $3.53 a share. After printing that low, the stock has started to rebound sharply with shares making higher highs and higher lows. This solid rebound has also now pushed PRTS into breakout territory, since the stock is starting to move above some near-term overhead resistance at $4.21.
Market players should watch for a high-volume move and close above $4.21 to trigger a breakout trade. Look for volume that’s tracking in close to or above its three-month average action of 80,383 shares. If we get that high-volume breakout, then watch for this stock to re-test its 50-day moving average of $4.89. If that $4.89-level is re-tested and breached with volume, then I expect this stock to spike towards $6 to $6.57 (200-day) a share.
One could look to buy this stock on any weakness as long as it closes above $4.21 with decent volume. Use a mental stop a few percentage points below the breakout level if you buy off weakness. I would then add aggressively to any long positions once this stock takes out its 50-day at $4.89 with high-volume.
This is another breakout candidate with a decent short interest. The current short interest as a percentage of the float for PRTS is rather high at 8.1%. That high short interest could fuel a massive spike higher in this stock once the 50-day is taken out to the upside, so keep this name on your trading radar.
-- 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.