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5 Stocks Setting Up to Break Out - 50847 views
BALTIMORE (Stockpickr) -- Stocks continue to move higher today as the U.S. dollar continues to go lower. This has been a recipe that has helped to bolster equity prices for some time now.
The Dow Jones Industrial Average, the S&P 500 and the tech-heavy Nasdaq are all officially trading in breakout territory. The three major U.S. indices are all trading at or near their 52-week highs. There is only one way to view this at the moment, and that’s bullish. The trend remains up, and the path of least resistance for U.S. equities is higher. As for the U.S. dollar, the trend remains down, and the path of least resistance is lower. Until this dollar trend changes, don’t expect to see stocks sell off.
There is a lot of talk on Wall Street right now that it might be prudent to “sell in May and go away,” an old traders adage. But it’s not prudent to make investment decision based off of seasonality trends that might or might not show up on the tape. What I would suggest is for traders to watch the action in market-leading stocks such as Apple (AAPL), Priceline.com (PCLN), Sohu.com (SOHU) Sina (SINA) and Baidu.com (BIDU).
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If you start to see these stocks roll over on expanding volume, then we could definitely see a major market correction. However, if these names continue to power higher and trend upwards, then don’t expect to see any change in the current trend for stocks. Instead, I would continue to search the market for stocks that are breaking out and look poised for higher prices.
Trading breakouts is not a new game on Wall Street. This strategy has been by legendary traders such as William O’Neal, Stan Weinstein and Nicolas Darvas. Every week, we throw our hat in the ring with analysis of several stocks that look poised to break out and trade significantly higher from current levels.
If you’re looking for a breakout play in the telecommunications space, then take a look at Sprint Nextel (S), a communications company offering a range of wireless and wireline communications products and services for individual consumers, businesses, government subscribers and resellers. This stock is off to a solid start in 2011, with shares up around 25%.
If you take a look at the chart for Sprint, you’ll see that the stock has started to break out above some past overhead resistance at around $5.26 a share. In fact, that past resistance level was the price point at which Sprint sold off dramatically in mid-March, all the way down to $4.17. I consider it very bullish that Sprint is trading above a level from which the sellers were previously able to cause such a sharp selloff.
What’s even more bullish is that upside volume is expanding dramatically as Sprint starts this new breakout. Volume on Thursday registered 130.5 million shares, well above the three-month average volume of 62.5 million shares. Volume today has already exceeded 62.5 million shares. As long as the stock remains near the highs of the day, then I would view this action as extremely bullish.
What market players should watch for now is for Sprint to make a run at its next significant resistance level of $5.94 a share. If you see this stock trade above that level, then I would get ready for a big move higher. The next resistance level after $5.94 is $7.50 a share, and after that its $10 a share.
There are some rumors in the market that Verizon Communications (VZ) might be eyeing Sprint as a takeover candidate. I have to say, the volume and action in the stock suggest that something could be up here. Either way, I see this stock trading dramatically higher if the volume and uptrend continues through $5.94.
If you think the energy sector is poised for higher stock prices, then check out the breakout under way in oil and gas exploration and production company Occidental Petroleum (OXY). Don’t let the fact that Occidental is trading at 52-week highs hold you back from considering this stock from the long side. Shares are up only 13% so far in 2011.
If you take a look at the chart for Occidental, you’ll see that the stock has started to trade above some past overhead resistance at around $107.08 a share. As I write this, Occidental is now exploding above $107 with shares changing hands at around $112 a share, a 6.7% move to the upside. What I absolutely love about this move is that it’s coming on monster volume.
Volume on Thursday (an up day) clocked in at 6.3 million shares, way above the three-month average volume of 4.3 million shares, and volume today is already above 6.3 million. This is exactly the kind of volume you want to see when a stock breaks out. This means that large institutional money managers are sponsoring this move, and it could mean the stock wants to trade significantly higher.
The way I would trade this from here is to buy some out-of-the-money call options that are a few months out on any weakness. If the breakout in Occidental is the real deal, then you’re going to see this uptrend for awhile, so I would want defined risk through options exposure.
If you’re looking for a breakout play in the banking sector, check out Banner (BANR), the holding company for Banner Bank and Islanders Bank, which provide commercial banking and financial products and services to individuals, businesses and public sector entities. This stock is off to a decent start in 2011, with shares up around 19%.
If you take a look at the chart for Banner, you’ll see that this under $5 bank stock has started to break out above some massive overhead resistance at around $2.63 a share. This stock has been failing and selling off just about every time it's reached around $2.40 to $2.60 a share for all of 2011. For that reason, I consider this move now to be very bullish.
Another bullish technical sign here for Banner is that volume is expanding dramatically as the stock starts to form this breakout. Volume on Thursday was an unbelievable 7.1 million shares, which is six times greater than the three-month average volume of just 912,000 shares. Volume today doesn’t look like it will be anywhere near that high, but it’s already above the three-month average.
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Apparently, investors liked Banner’s earnings report from Wednesday in which the company said it improved to a net loss of $7.8 million for the current quarter compared with a net loss of $12.7 million from the last quarter.
Market players should prepare to see this stock test its next significant resistance level which is at around $4 a share. If it can trade above $4, then get ready for $6 a share, which is the 52-week high for Banner. The way that the volume and price action are setting up here, I think we have a very good chance to see that 52-week tested before the end of 2011.
If you’re looking for a breakout play in the biotech space, then check out the action in NPS Pharmaceuticals (NPSP), a biopharmaceutical company focused on the development of new treatment options for patients with gastrointestinal and endocrine disorders and medical needs. This stock is off to a blazing start in 2011, with shares already up over 65%.
If you take a look at the chart for NPS Pharma, you’ll see that the stock has started to break out above some past overhead resistance at around $10.17 a share. The stock is now only about 30 cents away from hitting a new 52-week high of $10.57 a share.
Once again, we have another name that’s breaking out with strong volume. Volume for the last two trading sessions (both up days) clocked in at 3.3 million and 2.7 million, which is well above the three-month average volume of 1.3 million shares. Volume today isn’t as impressive with only around 340,000 so far, but I would continue to monitor this action if the stock can take out that 52-week high.
There could be some good upside from here on NPSP since the next significant resistance level is at around $14 a share. The company is set to report earnings on May 3, so we could have a situation here where some big traders are starting to get in ahead of the report.
Another biotech breakout candidate is Ariad Pharmaceuticals (ARIA), which is focused on the discovery and development of drugs to provide therapeutic intervention in treating human diseases at the cellular level. This is another hot performer so far in 2011, with shares up over 70%.
If you take a look at the chart for Ariad Pharma, you’ll see that the stock is just starting to break out above some past overhead resistance at around $8.50 to $8.60 a share. This move today has taken the stock to a brand new 52-week high. The only thing we don’t have here with this breakout is higher volume. For the last two trading sessions (both up days) volume was right around 2 million shares, which is basically the same as the three-month average volume.
Volume so far today is trending above 1 million. I would monitor how volume shapes up in the next couple of trading session and look for it to expand if this stock wants to go higher. The next areas of significant resistance on ARIA areat $10.50 and $11.50 a share, so we have plenty of upside from here if the stock wants to continue higher.
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Ariad Pharma is set to report its earnings on May 5, so we could have another situation here with people getting in ahead of the quarter.
This is also a heavily shorted stock, with a current short interest as a percentage of the float of 9.4% as of April 15. Nothing is worse for a short-seller than being short a stock that’s breaking out to new 52-week highs. This high short interest could provide the rocket fuel to power Ariad much higher from here, so keep this name on your radar.
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.