Stock Quotes in this Article: BBY, CSTR, DGIT, P, SUPN

MADISON, Wis. (Stockpickr) -- Trading stocks that trigger major breakouts can lead to massive profits. Once a stock trends to a new high, or takes out a prior overhead resistance point, then it's free to find new buyers and momentum players that can ultimately push the stock significantly higher.

One example of a solid breakout trade I flagged recently was Internet radio services provider Pandora Media (P), which I featured in April 26's "5 Stocks Poised for Big Breakouts" at around $14.20 a share. I mentioned in that piece that shares of P had recently formed a double bottom chart pattern and the stock was starting to bounce strongly right off its 50-day moving average. That move was quickly pushing shares of P within range of triggering a near-term breakout above some overhead resistance levels that had acted as a wall for the stock for the prior two months. Those resistance levels were at $14.03 to $14.32 and its 52-week high at $14.70 a share.

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Guess what happened? Shares of P triggered that breakout the following week, and the stock hit a high of $15.21 a share. This stock pulled back following that breakout to right above its 50-day moving average, and then it resumed its uptrend and broke out again above $15.21 a share with heavy upside volume. This stock continued to soar, with shares hitting a new 52-week high of $17.16 a share earlier this week. That represents a solid gain in very short timeframe for anyone who took the breakout trade.

Breakout candidates are something that I tweet about on a daily basis. I frequently tweet out high-probability setups, breakout plays and stocks that are acting technically bullish. These are the stocks that often go on to make monster moves to the upside. What's great about breakout trading is that you focus on trend, price and volume. You don't have to concern yourself with anything else. The charts do all the talking.

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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.

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Supernus Pharmaceuticals

One stock that's starting to move within range of triggering a major breakout trade is Supernus Pharmaceuticals (SUPN), which is focused on developing and commercializing products for the treatment of central nervous system, or CNS, diseases. This stock has been under pressure by the sellers so far in 2013, with shares off by 18.6%.

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If you take a look at the chart for Supernus Pharmaceuticals, you'll notice that this stock has been uptrending for the last month, with shares moving higher from its low of $4.45 to its intraday high of $6.09 a share. During that uptrend, shares of SUPN have been consistently making higher lows and higher highs, which is bullish price action. That move has now pushed shares of SUPN back above its 50-day moving average at $5.52 a share, and the stock is now quickly moving within range of triggering a major breakout trade.

Traders should now look for long-biased trades in SUPN if it manages to break out above some near-term overhead resistance levels at $5.68 to $6.29 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 438,265 shares. If that breakout triggers soon, then SUPN will set up to re-test or possibly take out its next major overhead resistance levels at $7 to $8 a share. Any high-volume move above $8.06 to $8.15 would then give SUPN a chance to re-fill some of its previous gap down zone from last December that started near $11 a share.

Traders can look to buy SUPN off any weakness to anticipate that breakout and simply use a stop that sits right around its 50-day at $5.52 a share or right below $5 a share. One could also buy SUPN off strength once it takes out those breakout levels with volume and then simply use a stop right below its 50-day at $5.52 a share.

This stock is a favorite target of the short-sellers, since the current short interest as a percentage of the float for SUPN is extremely high at $30.8%. The bears have also been increasing their bets from the last reporting period by 21.4%, or by about 750,000 shares. If this stock triggers that breakout soon, then the bears could get caught pressing their bets into a monster move higher.

Digital Generation

Another stock that looks poised to trigger a breakout trade and potentially move higher is Digital Generation (DGIT), which provides digital technology services that enable the electronic delivery of advertisements, syndicated programs and video news releases to traditional broadcasters, online publishers, and other media outlets. This stock has been hammered by the bears so far in 2013, with shares off by 32%.

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If you take a look at the chart for Digital Generation, you'll notice that this stock recently crossed back above its 50-day moving average at $6.85 a share. Since that move, shares of DGIT have been consolidating between $7.01 and around $7.50 a share. This stock now looks ready to challenge some near-term overhead resistance levels, which if get taken out will trigger a near-term breakout trade.

Market players should now look for long-biased trades in DGIT if it manages to break out above some near-term overhead resistance levels at $7.64 to $7.78 a share and then once it takes out more resistance at $8.24 a share with high volume. Look for a sustained move or close above those levels with volume that registers near or above its three-month average action of 758,814 shares. If that breakout triggers soon, then DGIT will set up to re-test its next major overhead resistance levels at 9.50 to $10.30 a share, or even $11 to $11.50 a share.

Traders can look to buy DGIT off any weakness to anticipate that breakout and simply use a stop that sits right below its 50-day at $6.85 a share, or near more support at $6.50 a share. One could also buy DGIT off strength once it takes out those breakout levels with volume and then simply use a stop that sits right below $7 a share, or its 50-day at $6.85 a share. I would add to either position if DGIT takes out $8.24 a share with high volume.

This is another heavily-shorted stock, since the current short interest as a percentage of the float for DGIT is massive at 38.1%. If that breakout triggers soon, then DGIT could easily experience a monster short-squeeze that sends shares soaring higher.

Best Buy

One name that's quickly moving within range of triggering a near-term breakout trade is Best Buy (BBY), a multinational retailer of consumer electronics, computing and mobile phone products, entertainment products, appliances and related services. This stock has been on fire so far in 2013, with shares up a whopping 122%.

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If you look at the chart for Best Buy, you'll notice that this stock has been trending sideways inside of a consolidation pattern for the last few weeks, with shares moving between $25 on the downside and $27.15 on the upside. Shares of BBY are now starting to uptrend and move within range of breaking out above the upper end of its recent sideways chart pattern.

Market players should now look for long-biased trades in BBY if it manages to break out above some near-term overhead resistance levels at $27 to its 52-week high at $27.15 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 11.49 million shares. If that breakout hits soon, then BBY will set up to enter new 52-week-high territory, which is bullish technical price action. Some possible upside targets off that breakout are $30 to $35 a share, or possible even $40 a share.

Traders can look to buy BBY off any weakness to anticipate that breakout and simply use a stop that sits right below some near-term support levels at $25.70 to $25 a share. One can also buy BBY off strength once it clears those breakout levels with volume and then simply use a stop right below $26 or $25.70 a share.

This stock has a decent amount of bears involved in the name, since the current short interest as a percentage of the float for BBY is 9.6%. We could get a solid short-covering rally if BBY breaks out soon, so make sure to keep this name on your breakout trading radar.

OSI Systems

Another stock that's quickly moving into range of triggering a near-term breakout trade is OSI Systems (OSIS), which is engaged in the design and manufacture of electronic systems and components for critical applications. This stock hasn't done much in 2013, with shares up just 2.6%.

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If you look at the chart for OSI Systems, you'll notice that this stock has been on a rampage higher for the last few weeks, with shares soaring from its low of $55.06 to its intraday high of $65.93 a share. During that uptrend, shares of OSIS have been consistently making higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of OSIS within range of triggering a near-term breakout trade.

Traders should now look for long-biased trades in OSIS if it manages to break out above some near-term overhead resistance levels at its 200-day moving average at $65.95 a share and then once it takes out more resistance at $66.18 a share with high volume. Look for a sustained move or close above those levels with volume that registers near or above its three-month average volume of 290,132 shares. If that breakout triggers soon, then OSIS will set up to re-fill some of its previous gap down zone from January that started at $72 a share.

Traders can look to buy OSIS off any weakness to anticipate that breakout and simply use a stop that sits right below some near-term support at $64 a share. One can also buy OSIS off strength once it takes out those breakout levels with volume and then simply use a stop that's a few percentage points below your entry point.

Coinstar

My final breakout idea is Coinstar (CSTR), which is a provider of automated retail solutions offering convenient products and services that benefit consumers and drive incremental retail traffic and revenue for retailers. This stock has been trending up modestly so far in 2013, with shares up 8.9%.

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If you look at the chart for Coinstar, you'll notice that this stock has just started to trend back above its 50-day moving average of $55.76 a share. This move is coming after shares of CSTR recently dropped sharply from its high of $59.48 a share to its low of $50.70 a share. This stock is now quickly moving within range of triggering a near-term breakout trade that could send shares ripping higher;

Traders should now look for long-biased trades in CSTR if it manages to break out above some near-term overhead resistance at $57 a share with high volume. Look for a sustained move or close above that level with volume that registers near or above its three-month average action of 795,819 shares. If that breakout triggers soon, then CSTR will set up to re-test or possibly take out its major overhead resistance levels at $59.48 to $65 a share.

Traders can look to buy CSTR off any weakness to anticipate that breakout and simply use a stop that sits right below its 50-day at $55.76 a share or right below $55 a share. One could also buy CSTR off strength once it clears $57 a share with volume and then simply use a stop right below its 50-day at $$55.76 a share.

This is a heavily-shorted stock, since the current short interest as a percentage of the float for CSTR is massive at 44.9%. This stock could easily explode higher if that breakout triggers soon, so make sure to have this name on your breakout trading radar.

To see more breakout candidates, check out the Breakout Stocks of the Week portfolio on Stockpickr.

-- Written by Roberto Pedone in Madison, Wis. 

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At the time of publication, author had no positions in stocks mentioned.

Roberto Pedone, based out of Madison, Wis., is an independent trader who focuses on technical analysis for small- and large-cap stocks, options, futures, commodities and currencies. Roberto studied international business at the Milwaukee School of Engineering, and he spent a year overseas studying business in Lubeck, Germany. His work has appeared on financial outlets including CNBC.com and Forbes.com. You can follow Pedone on Twitter at www.twitter.com/zerosum24 or @zerosum24.