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5 Stocks Setting Up to Break Out - views
WINDERMERE, Fla. (Stockpickr) -- U.S. stocks are advancing modestly higher this morning ahead of the Federal Reserve meeting that’s scheduled for later today. Some market observes believe that we could get another round of quantitative easing, or QE3, but others feel that the Fed will do nothing more until we move into the new year.
Some traders are also getting long stocks today ahead of the much-anticipated Zynga (ZNGA) IPO (I wrote about it back in May); the stock is slated to start trading on Friday. A strong showing by Zynga could easily perused large money managers to chase some high-beta tech and social networking stocks that could move higher in front of the IPO.
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At last check, the Dow Jones Industrial Average moving higher by over 57 points and the S&P 500 was up 6 points. The tech-heavy Nasdaq was trending higher by over 3 points.
There are still hopes among market players that equities will experience a year-end rally as hedge fund and mutual fund managers chase performance to boost returns. If we get that action, then a number of stocks are going to 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 several stocks setting up to break out and potentially trade higher from current levels.
One stock that’s bumping up against a key breakout level today is InterMune (ITMN), a biotechnology player focused on the research, development and commercialization of therapies in pulmonology and fibrotic diseases. This stock has been trending lower in 2011, with shares off by over 45%.
If you take a look at the chart for InterMune, you’ll see that this stock has dropped hard from its November high of $27.23 to a recent low of $16.46 a share. After hitting that low, the stock has started to bounce sharply and is now starting to flirt with a breakout back above its previous support level of $19.15, which has turned into near-term resistance. You will see this happen with many stocks, when a previous support level is broken it turns into new resistance.
Market players should now watch ITMN for a sustained high-volume move and close back above $19.15 a share. Watch for volume today that registers above its three-month average action of about 1.3 million shares. If we see that action, then this stock should setup nicely to trend back towards its 50-day moving average of $21.19 to $22 a share at the minimum in the short-term. If those levels are then taken out with volume, look for a bigger run back towards $26 to $27 a share.
One could be a buyer of ITMN off strength once it takes out $19.15 with volume and simply place a mental stop a few percentage points below that level. The stock has already hit $19.33 today, so watch to see if it can now close above $19.15 today.
Another stock that’s just starting to break out is Lumos Networks (LMOS), a fiber-based service provider in the Mid-Atlantic region. Lumos provides data, broadband, voice and Internet protocol services over fiber optic network. This stock recently came public, and it’s up over 40% since its IPO debut.
If you take a look at the chart for Lumos Networks, you’ll see that this stock has started to break out today above some past overhead resistance at $15.16 a share. The volume so far today is very light and well below its average daily volume of 100,630 shares. Despite the light volume so far, LMOS has hit a daily high of $16.45, which is well above that breakout level of $15.16.
Traders should watch to see if LMOS can close near its daily highs, which will put it well above $15.16 on high-volume. If we see the volume improve at the end of trading today, then this stock should setup nicely to trade back towards its all-time high of $17.99 a share. If we can tap that all-time high with high-volume that’s near or above 100,630 shares, then this stock should easily setup to tag $20 a share at the minimum.
One could be a buyer of LMOS off any weakness and anticipate the move to $18 or higher. Look for a decent pullback to get long, and then simply use a mental stop a few percentage points below the $15.16 a share. Also look for the volume to expand a bit before you trust this move today.
One stock in the broadcasting complex that’s setting up for a big breakout is Primo Water (PRMW), a provider of three- and five-gallon purified bottled water and water dispensers sold through retailers. This stock has been crushed by the sellers in 2011 with shares off by over 75%.
If you look at the chart for Primo Water, you’ll see that this stock took a dive from its October high of $6.52 to its recent low of $2.72 a share. Since making that low, the stock has started to find some big buying support and the bulls have managed to push up shares to its current price of around $3.20 a share. This recent spike has also moved the stock very close to a big near-term breakout.
Market players should now watch for a high-volume breakout in PRMW above some near-term overhead resistance at $3.45 a share. Look for volume on any breakout that registers close to or near its three-month average action of 570,181 shares. If we get that breakout, then this stock should easily re-test its 50-day moving average of $4.43 a share, and then possibly move towards $6 to $6.50, if the 50-day is taken out with volume.
If you’re bullish on PRMW, then one could be a buyer off any weakness and anticipate the breakout. Simply use a mental stop at around $3 a share or a bit lower to control your risk. You could also just buy off strength and get long once it takes out $3.45 with big volume. Add to any long positions once it gets back above its 50-day of $4.43 on high-volume.
One stock in the broadcasting and cable TV complex that’s close to a near-term breakout is Comcast (CMCSA), a provider of video, high-speed Internet and phone services (cable services) to residential and business customers in the U.S. and nutritional products. This stock is up modestly in 2011, with shares higher by around 7%.
If you look at the chart for Comcast, you’ll see that this stock is quickly approaching a near-term breakout if it can manage to clear some past overhead resistance at $23.89 a share. The stock has also started to flirt with its 200-day moving average $23.39 a share, and it recently spiked back above its 50-day moving average of $22.78, which is bullish action. If shares of Comcast can close above its 200-day moving average soon, then the stock should setup to test that breakout over $23.89.
Market players should now watch CMCSA for a sustained high-volume move and close above $23.39 and then $23.89 to trigger a large move higher. Look for volume on any move above those levels that hits near or well above its three-month average volume of 19,506,700 shares. If we get that action soon, then look for CMCSA to trend back towards $25.32 a share at a minimum.
If you’re bullish on CMCSA, look to be a buyer off any weakness and simply anticipate the breakout. I would look to use a mental stop that’s right below the 50-day moving average of $22.78, in case CMCSA isn’t ready to breakout just yet. If that breakout hits after you buy, then look to add to the position off any high-volume move over $25.32. Target a run to $26 to $27 if we get a high-volume breakout on the near future.
One more stock that’s triggering a technical breakout today is GeoEye (GEOY), a commercial provider of earth imagery, and a provider of image-processing services and geospatial information services to the U.S. and foreign government defense and intelligence organizations, domestic federal and foreign civil agencies and commercial customers. This stock has been trending lower by over 50% in 2011.
If you look at the chart for GeoEye, you’ll notice that this stock has been destroyed by the sellers since it printed its October high of $37.07, and it printed a recent low of $17.98 a share. After hitting that low, the stock formed a double bottom at $17.98 to $18.04 a share. Now shares of GEOY are starting to break out above some near-term overhead resistance of $19.29 a share.
Market players should watch for a sustained high-volume move and close above $19.29 to trigger a major breakout. Look for volume today that registers near or above its three-month average action of 286,780 shares. If we get that high-volume breakout, then this stock could have tremendous upside from here.
You could be a buyer of this stock off any weakness now that it’s started to trend above $19.29 in early trading. I would simply use a mental stop that’s a few percentage points below that key breakout level. If this stock can manage to close above $19.29 today and near its daily highs, then we could be in the early stages of a move back towards its 50-day moving average of $26.77.
-- 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.