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5 Stocks Setting Up to Break Out - views
WINDERMERE, Fla. (Stockpickr) -- Stocks are soaring today after investors cheered some better-than-expected U.S. housing numbers and uplifting economic news out of the troubled eurozone.
At last check, the Dow Jones Industrial Average was soaring by a whopping 280 points and the S&P 500 was up over 30 points. The tech-heavy Nasdaq was spiking higher by over 70 points.
The Commerce Department released better-than-expected housing starts in November that showed a 9.3% jump to 685,000, up from the revised October estimate of 627,000 and better than the Wall Street forecast of 630,000 from economists surveyed by Thomson Reuters.
News out of Europe today also boosted stock prices after Germany said its business sentiment in December upticked to 107.2 points, which was an improvement from the last two months that saw very little change. Spain also added to the bullish news flow after a 5.6 billion-euro Spanish short-term debt auction went off without a hitch.
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. If today’s action is the start of a much bigger market rally, then we’re going to see tons of stocks in different sectors setup to breakout.
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.
With that in mind, 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 just starting to break out today is Raven Industries (RAVN), an industrial manufacturer providing a variety of products. This stock has been a big winner in 2011, with shares up over 30%.
If you take a look at the chart for Raven Industries, you’ll notice that the stock has just started to break out toady above some near-term overhead resistance at $61.43 a share. If this breakout can hold into the close, then RAVN will set up to challenge an even bigger breakout above some more near-term overhead resistance at $63.50 and $64.88 a share. A high-volume move and close above those levels will push RAVN into all-time high territory, which is bullish price action.
Traders should now watch for RAVN to close over $61.43 to $63.50 today on solid volume. Look for volume that’s near or well above its three-month average action of 61,945 shares. If we get that action, then look for RAVN to take out $64.88 with volume in the near future.
One could be a buyer of RAVN off any weakness and simply place a mental stop just a few percentage points below the breakout level of $61.43 a share. I would then add to any long positions if we take out $64.88 with volume, since that will set the stock up to push into all-time-high territory.
Another stock that’s quickly approaching a big breakout is Lincare (LNCR), a provider of oxygen and other respiratory therapy services to patients in the home. This stock hasn’t done much in 2011, with shares off by around 7%.
If you take a look at the chart for Lincare, one of the top-yielding health services stocks, you’ll notice that this stock has been making higher lows since it bottomed in September around near $19.50 a share. Whenever any stock makes higher lows it demonstrates that large traders are paying up to own shares, which is bullish. Now shares of LNCR are starting to break out above some past overhead resistance at $24.51 a share.
If this breakout can hold, then LNCR is going to set up to test its 200-day moving average of $25.72.
Market players should now watch for LNCR to sustain a high-volume move and close above $24.50 and then $25.70 to trigger a much larger move higher. Look for volume on any move above those levels that registers near or above its three-month average action of about a million shares. If we get that action, then LNCR should setup to trend back toward $28 to $30 a share.
One could be a buyer of LNCR off any weakness and anticipate the breakout above $24.50 and $25.70 a share. At last check, the stock was trading at $24.78 so the first breakout level has already triggered. If you get long off weakness, I would simply use a mental stop a few percentage points below its 50-day moving average of $23.34.
A stock in the software and programming complex that’s just starting to break out today is Mentor Graphics (MENT), a supplier of electronic design automation systems-advanced computer software and emulation hardware systems used to automate the design, analysis and testing of electronic hardware and embedded systems software in electronic systems and components. This stock is up around 12% so far this year.
If you look at the chart for Mentor Graphics, you’ll see that this stock formed a triple bottom in August and September at $8.50 to $8.75 a share. After putting in that major bottom, the stock then took off and ripped to the upside to its current price of around $13.50 a share. That massive move up has now started to trigger a breakout trade today since shares of MENT are moving above some near-term overhead resistance at $12.98 to$13.17 a share on decent volume.
Market players should now watch for a sustained high-volume move and close above $13.17 and near the daily high of $13.52 to trigger a big breakout. Look for volume at today’s close that’s near or well above its three-month average action of about a million shares. If we see a close for MENT into breakout territory, then watch for this stock to make a run at its next significant overhead resistance levels of $15.40 to $16 a share in the near future.
If you like how Mentor’s chart looks, then one could be a buyer off any weakness and simply use a mental stop that’s a few percentage points below $13.17, or even just a few points below $12.98 a share.
A stock in the furniture and fixtures complex that’s quickly approaching a big breakout is Select Comfort (SCSS), which develops, manufactures, markets, distributes and retails adjustable-firmness beds and other sleep-related accessory products in the U.S., Canada and Australia. This stock has been a monster winner in 2011, with shares up over 130%.
If you look at the chart for Select Comfort, you’ll see that this stock formed a perfect double at $11.89 and $11.97 a share back in August and October. After hitting that bottom, the stock zoomed to the upside and now trades near $21 a share. This huge run up in the stock has also taken SCSS very close to triggering a major breakout.
Traders should keep an eye on SCSS for a sustained high-volume move and close above $21.14 and then $22.19 a share. A high-volume move above those levels will trigger a big breakout that should spike the stock significantly higher. Look for volume on any move above those levels that tracks in near or above its three-month average volume of about 1.2 million shares. If we get that action soon, then look for SCSS to make a run at its next major past resistance level of $25 a share, or possibly much higher.
If you’re bullish on SCSS, 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 $19.53 a share, in case the stock isn’t ready to breakout just yet. If you buy the stock off weakness, then I would look to add to any long positions once SCSS takes out $22.19 with volume.
Catalyst Pharmaceutical Partners
One more stock that’s worth keeping on your breakout trading radar is Catalyst Pharmaceutical Partners (CPRX), which is focused on the development and commercialization of prescription drugs targeting addiction and diseases of the central nervous system. This stock has been trending modestly high in 2011, with shares up by around 7%.
If you look at the chart for Catalyst Pharmaceutical Partners, you’ll see that this stock spiked big today and broke out above $1.20 to $1.21 a share on monster volume. The reason for the monster spike and volume was due to news that their investigational drug, CPP-115 has been designated as a Fast Track development program by the FDA for treatment of cocaine dependency. Off that news, the stock touched $1.39 a share and volume has already registered over 440,000 shares, which is well above its three-month average volume of 120,445 shares.
Market players should now watch for a sustained move and close back above $1.20 to $1.21 a share to trigger another breakout trade. Since those breakout levels were only tested intraday, I would now like to see if CPRX can close above those levels with volume. If we can get above those levels on the close, then this stock can setup to re-test $1.39, or potentially trend much higher. Keep in mind that traders sold the news, so this stock is going to need to regain its upside momentum to look attractive from the long side.
One could be a buyer of this stock near its current level of $1.10 a share and anticipate another big spike higher. I would simply use a mental stop at a major near-term support zone of $1.01 a share in case the bullish move is over. I would add to any long positions in CPRX on a close above its 200-day moving average of $1.31 and then above today’s high of $1.39 on high-volume. If we get that action, this stock has upside towards $1.46 to $1.90 a share.
To see more breakout candidates, check out the Breakout Stocks of the Week portfolio on Stockpickr.
-- 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.