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5 Stocks Setting Up to Break Out - views
WINDERMERE, Fla. (Stockpickr) -- The markets are prepared to close a harsh week on a high note, as traders look forward to the debut of the much-anticipated Facebook (FB) IPO. A positive showing for Facebook shares could spark a change in the recent downtrend in the U.S. equity markets.
The S&P 500 is on a five-day losing streak, having dropped 3.9% over that timeframe. That popular index is now trading near its lowest level since the middle of January. The Dow Jones Industrial Average is also trading near its late January lows, after this broad index has dropped close to 1,000 points during just the month of May. The tech-heavy Nasdaq is now trading near lows last seen in late January, after it has dropped over 200 points in May.
If the Facebook IPO is a success today, then we could see money start to flow back into the tech sector and other areas of the market. That could spark new breakouts among many stocks on Wall Street, and more important, it could reverse the current bearish trend. Of course, on the flipside, if the Facebook IPO has a bad showing, then the market could just continue on with its recent downtrend and head much lower.
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 five stocks that are setting up to break out and trade higher from current levels.
One retail stock that’s trading within range of trigging a near-term breakout trade is Sears (SHLD), which operates as a specialty retailer in the U.S. and Canada. This stock is off to a monster start in 2012, with shares up over 60%.
If you take a look at the chart for Sears, you’ll see that this stock sold off hard from its recent high of $85.90 to a low of $49.75 a share. After hitting that low, Sears found big buying interest and formed a double bottom at around $50 a share. This stock is now setting up to challenge some near-term overhead resistance and potentially trigger a breakout trade.
Traders should now look for long-biased traders in SHLD if the stock can manage to trigger a breakout above some near-term overhead resistance at $57.24 and then its 200-day moving average at $58.60 a share with high volume.
Look for a sustained move or close above those levels with volume that hits near or above its three-month average action of 1.55 million shares. If we get that action soon, look for SHLD to tag its 50-day moving average of $63.29, or possibly even some more overhead resistance near $65.70 to $69.29 a share.
Look for confirmation of higher prices in SHLD as long as this stock is trending above its 200-day moving average of $58.60 with strong upside volume flows. Keep in mind that SHLD moved sharply higher on Thursday with volume of 3.33 million shares, which is well above its average volume.
I also featured Sears as one of my earnings short-squeeze plays this week.
Another stock that’s trading within range of a major breakout trade is Pandora Media (P), which provides Internet radio services in the U.S. As of Jan. 31, it had over 125 million registered users. This stock is off to a decent start in 2012 with shares up over 20%.
If you take a look at the chart for Pandora Media, you’ll notice that this stock plunged from its March high of $15.25 to a recent low of $7.83 a share. During that move lower, shares of Pandora have consistently made lower highs and lower lows, which is bearish technical price action. That said, this stock has completely changed its trend after recently breaking out above $9 a share. Shares of Pandora are now trading within range of triggering a big breakout trade.
Market players should now look for long-biased traders in P if it can manage to trigger a near-term breakout trade above some past overhead resistance at $11.60 with high volume. Look for a sustained move or close above that level on volume that registers close to or well above its three-month average volume of 3.2 million shares. If we get that action soon, then P could start to fill a big gap-down from late March that started at over $14 a share. That’s big potential upside from current levels since P is trading at around $10.50 a share.
If you buy this stock off of weakness and anticipate that breakout, then I would simply use a stop just below its 50-day moving average of $9.62 a share. You can also just buy off of strength and get long once $11.60 is taken out with strong volume and then simply use a stop a few percentage points below $11.60.
I also included Pandora on my list of stocks that could see some big action off of Facebook's IPO today.
One stock in the communications services complex that looks ready to trigger a big breakout trade is 8x8 (EGHT), which develops and markets telecommunications services for Internet protocol, telephony and video applications, as well as Web-based conferencing and unified communications services, managed hosting and cloud-based computing services. This stock is off to a decent start in 2012, with shares up over 25%.
If you look at the chart for 8x8, you’ll notice that this stock has been trading range bound for the past few months, between $3.76 and $4.33 a share. This range for 8x8 has created a base for the stock since buyers have consistently supported the price whenever it’s pulled back under $4 toward $3.80 a share. On Thursday, shares of 8x8 soared back above both its 50-day and 200-day moving averages with heavy volume. Volume clocked in at 1.64 million shares which are well above its three-month average volume of 569,934 shares. That bullish action has now pushed 8x8 with range of triggering a major breakout trade.
Traders should now look for long-biased trades if EGHT can manage to take out some near-term overhead resistance at $4.20 to $4.33 a share with high volume. Look for a sustained move or close above those levels with volume that’s near or well above its three-month average action of 569,934 shares. If we get that action soon, then look for EGHT to easily hit its March high of $4.73 a share, or possibly even move above $5 a share.
I would simply use a stop on EGHT right below $3.76, or even right below its 200-day moving average of $4.00 if you buy this stock off of weakness and anticipate the breakout. I would add to any long positions in EGHT if spikes higher and takes out some past overhead resistance at $4.95 with volume. A move over $4.95 will put its next significant overhead resistance level of $5.44 within range.
Another stock in the computer services complex that’s moving very close to a breakout trade is Demand Media (DMD), which is focused on an Internet-based model for the professional creation of content at scale. This stock is off to a bullish start in 2012 with shares up over 35%.
If you look at the chart for Demand Media, you’ll notice that this stock has been uptrending strong for the past couple of months, with shares surging from a low of $5.85 to a recent high of $9.69 a share. During the month of May, shares of Demand Media have seen some monster upside volume days as the stock has trended between $9 and $9.69 a share. This action has now pushed Demand Media within range of triggering a major breakout trade.
Market players should now look for long-biased traders in DMD if this stock can manage to trigger a break out above some near-term overhead resistance at $9.69 a share with high-volume. Look for a sustained move or close above $9.69 with volume that registers near or well above its three-month average action of 394,755 shares. If we get that action soon, then DMD has some solid upside potential since its next significant overhead resistance levels are at $10.75 to $12-$13 a share.
I would look to play this breakout off of strength here since buying into weakness would have me waiting for a significant pullback towards $8 or around its 50-day moving average of $7.56 a share. I would look to play DMD once it takes out $9.69 with big volume and simply use a stop just that’s a few percentage points below that level if the breakout hits soon.
One final stock that’s trading within range of a major breakout trade is communications giant Verizon Communications (VZ), a provider of communications, information and entertainment products and services to consumers, businesses and governmental agencies. This stock is off to a slow start in 2012, with shares up just 3% so far.
If you look at the chart for Verizon, you’ll see that this stock has been uptrending strong since its April low of $36.80 a share. During that uptrend, shares of Verizon have consistently made higher lows and higher highs, which is bullish technical price action. That strength has now pushed VZ within range of triggering a breakout trade that would push the stock into new 52-week high territory.
Traders should now look for long-biased trades in VZ if it can manage to trigger a break out above some near-term overheard resistance at $41.43 a share with high-volume. Look for a sustained move or close above that level with volume that’s near or well above its three-month average action of 14.5 million shares. If we get that action soon, then VZ has a great chance to trade up towards its next significant overhead resistance levels near $45 to $50 a share.
Traders should now consider getting long VZ as long as it’s trending above its 50-day moving average of $39.06 a share, and above that breakout level of $41.43 a share. I would use a stop just below the 50-day if we see some weakness soon, or I would buy a strong volume breakout over $41.43, and then simple use a stop at around $40.50 a share. Volume on Thursday clocked in at 15.6 million as VZ pushed near that breakout level, which is a bullish sign since it’s above the average action.
Verizon shows up on a recent list of 5 Stocks Ready for Rising Data Demand.
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.