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5 Stocks Setting Up to Break Out - views
WINDERMERE, Fla. (Stockpickr) -- U.S. stocks are trending noticeably lower today as fears grow among investors over Italy’s long-term debt auction set for Thursday.
It appears that traders are taking some risk off the table ahead of the Italian auction as the euro prints new 11-month lows. Weak demand for Italian debt on Thursday could stoke more sovereign debt fears, so traders are selling equities first and asking questions later.
At last check, the Dow Jones Industrial Average had shed 131 points, and the S&P 500 was off by around 14 points. The tech-heavy Nasdaq was trending lower by 30 points.
Despite the overall weakness in the market today, a number of stocks are showing relative strength and either trending significantly higher or setting up for key technical breakouts. Often when a stock triggers a major breakout, it will trend higher despite any overall market weakness.
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.
One stock that’s nearing a big breakout is Zogenix (ZGNX), a specialty pharmaceutical company with two product candidates in late-stage development for the treatment of central nervous system disorders and pain. This stock has been hammered in 2011, with shares off by over 60%.
If you take a look at the chart for Zogenix, you’ll see that this stock triggered a big breakout today once it moved above some near-term overhead resistance at $1.91 a share on monster volume. At last check, volume has registered over 1.7 million, which is well above its three-month average action of 240,417 shares. The stock is now nearing an even bigger breakout trade if it can manage to clear some more overhead resistance levels.
Traders should now watch ZGNX for a move and close above $2.20 to $2.40 on solid volume in the coming days or weeks. Look for volume that’s near or well above its three-month average action of 240,417 shares. If we get that action, then look for ZGNX to make a run at its 200-day moving average of $3.42 a share or possibly much higher.
You could be a buyer of ZGNX off any weakness and simply place a mental stop just a few percentage points below the breakout level of $1.91 a share. If you buy off of weakness, then I would add to any long positions once it takes out today’s high of $2.40 with heavy volume.
Another stock that’s quickly approaching a major breakout is EnerNOC (ENOC), a provider of clean and intelligent energy solutions, which include demand response services, energy efficiency, or monitoring-based commissioning, services, energy procurement services and emissions tracking and trading support services. This stock has gotten creamed in 2011, with shares off by over 50%.
If you take a look at the chart for EnerNOC, you’ll notice that this stock has been making higher lows for the past few months after it formed a double bottom chart pattern at around $8 to $8.05 in October. Whenever any stock is making higher lows, then it’s considered bullish price action. Now shares of ENOC are setting up for a major breakout if it can manage to take out some near-term overhead resistance levels.
Traders should now watch for ENOC to sustain a high-volume move and close above $10.65 to $11.05 (today’s high) to trigger a bigger spike higher. Look for volume that’s tracking in near or above its three-month average action of 326,021 shares. So far today, the volume for ENOC has hit 360,000 shares, which is well above its average volume.
You could be a buyer of ENOC off any weakness since the stock is flirting with a close over $10.65 today on high volume. I would use a mental stop near today’s low of $10.25 in case the breakout fails to hold. I would target a run back toward $12.24 a share if ENOC continues to trend above its key breakout levels. If $12.24 is then taken out with volume, then look for a bigger move towards its 50-day moving average of $13.69 a share.
This is a heavily shorted stock since 14% of the tradable float for ENOC is sold short by the bears. Any near-term breakout for ENOC could easily spark a monster short-squeeze, so make sure to keep this name on your trading radar.
A stock in the food processing complex that’s getting close to triggering a near-term breakout is Diamond Foods (DMND), a packaged food company focused on building, acquiring and energizing brands. This stock is down big in 2011, with shares off by over 43%.
If you look at the chart for Diamond Foods, you’ll see that this stock has been beaten down from its November high of over $60 a share to a recent low of $26.11. Since printing that low, this stock has started to firm up and print higher lows, which is bullish. Now shares of DMND are approaching a big breakout if it can manage to move above a near-term overhead resistance level.
Market players should now watch for a sustained high-volume move and close above $31.13 to trigger a breakout trade. Look for volume on any move above $31.13 that’s near or above its three-month average action of 2,172,120 shares. At last check, DMND is trading near $30 and volume is already over 2 million shares. It looks like there’s a strong chance that high-volume breakout is going to trigger soon, so put this stock on your trading radar.
If you like how DMND’s chart is shaping up, then one could be a buyer once it sustains a high-volume move and close over $31.13. You could also buy off of weakness and simply set a mental stop below some near-term support at $28 a share. If we do see that breakout trigger with volume, then look for DMND to make a big spike back towards its 50-day moving average of $40.57 a share, or possibly much higher.
Keep in mind that DMND is one of the most heavily shorted stocks in the market, with over 40% of its tradable float sold short by the bears. Any move over $31.13 with volume should spark a monster short-squeeze that could spike this stock significantly higher from current levels.
One stock in the computer services complex that’s flirting with a major breakout today is Google (GOOG). This stock has done too much for the bulls or bears in 2011, with shares up around 7.9%.
If you look at the chart for Google, you’ll notice that this stock is flirting with a major breakout now that shares are bumping up against its 2011 high of $642.96 a share, which is also a big overhead resistance level. At last check today, Google has printed a high of $645 a share, but has since then pulled back to its current price of around $643 a share.
Traders should now watch GOOG for a sustained high-volume move and close above $642.96 to $645 a share to trigger a much larger spike higher. Look for volume that’s tracking in near or above its three-month average action of 3,094,800 shares. At last check, volume has registered just 1.4 million shares, which is significantly below the average action. If that volume can improve into the close, or in the next couple of trading sessions, then look for a large spike higher in GOOG.
If you’re bullish on GOOG, look to be a buyer of this stock off any weakness and simply use a mental stop that’s a few percentage points below the breakout level near $643 a share. If GOOG is going to rip higher in the coming days of weeks, then the stock shouldn’t trend too much below that $643 level. One way to play GOOG is to buy some near-the-money call options if you see the volume improve and the stock trending above $643. Target a $30 to $50 spike higher in GOOG if this breakout holds.
One more stock that’s worth keeping on your breakout trading radar is Inovio Pharmaceuticals (INO), which is engaged in the discovery, development and delivery of vaccines, called DNA vaccines, focused on cancers and infectious diseases. This stock has been hit hard by the sellers in 2011, with shares off by over 60%.
If you look at the chart for Inovio Pharmaceuticals, you’ll notice that this stock has been trading range bound for the past month between 45 cents on the upside and 35 cents on the downside. Now the stock has started to flirt with a major breakout since shares are testing the upper-end of that range, and it has started to break out above some near-term overhead resistance at $0.403 a share. This test of the upper-end of the range and the breakout are coming on monster volume. At last check, volume has registered over 804,000 shares, which is well above its three-month average action of 334,786 shares.
Traders should now watch for a sustained move and close above 40 cents and then 45 cents on high volume. Volume is going to easily register high today, so just look for a close near or above 45 cents to signal that this stock wants to trend significantly higher. If we get that close soon, then look for INO to make a run at its 50-day moving average of 52 cents. Any high-volume move over 52 cents should then set this stock up to re-test its next significant overhead resistance levels of 61 cents to 71 cents a share.
You could be a buyer of INO off any weakness and simply place a mental stop just below some near-term support at 37 cents to 35 cents a share. If you buy this stock off weakness, then I would simply add to any long positions once INO takes out 45 cents on a closing basis with heavy volume.
To see more breakout candidates like, 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.