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5 Stocks Setting Up to Break Out - 61010 views
WINDERMERE, Fla. (Stockpickr) -- U.S. stocks are trading to the upside today despite continued concerns over the European debt crisis and renewed unrest in Egypt.
From a psychological perspective, it’s always bullish when the market trends higher in the face of negative news. This is why I am consistently saying to trade the trend, or to trade according to what the market is doing. If you focus too much on what the news, you can easily become biased and lose your emotional edge on the market, leading to bad trading decisions.
The market wasn’t created to give you money; it’s there to make you money if you stay open to all possibilities. The trend is all that matters once you place your bets, not your emotions. Are you on the right side or the wrong side? Your profit and loss statement will tell you that quickly.
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Let’s also not forget that the market is going to see plenty more open market purchases from the Federal Reserve through its quantitative easing program into June. This is a powerful force that could act as a put on stock prices until the program is over. I know lots of traders want to be bearish ahead of the end of QE2, but before you start loading up on puts and shorting the markets, make sure the trend and price action is telling you that it’s the right move.
The Dow Jones Industrial Average is up over 25 points to 12,428, and the S&P 500 is trading up 6 points to 1332. The tech-heavyNasdaq has added 10 points to 2793. All three are still within range of their 52-week highs. It's also worth noting that the three indices have started to recapture their 50-day moving averages. That's the key level to watch in the coming weeks to see if it becomes support or resistance.
If the market wants to trade higher into the end of QE2, then plenty of stocks are going to set up to be bullish and break out. 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.
Her‘s a look at a number of stocks that look poised to break out and potential trade higher from current levels.
Melco Crown Entertainment
One stock that is quickly approaching a breakout is Melco Crown Entertainment (MPEL), one of the six companies licensed, through concessions or sub-concessions, to operate casinos in Macau. This stock has been a huge winner so far in 2011, with shares up over 70%.
If you take a look at the chart for Melco, you’ll see that the stock is quickly approaching a big breakout if it can manage to trade above some past overhead resistance at around $11 to $11.11 a share. This resistance zone is a big level for Melco since over the past two months, the stock has failed numerous times when it has hit those price points. If Melco can now manage to get above these prices, it could then be setting up to break out and trade significantly higher.
The next significant resistance level on Melco sits at around $15 a share. That’s a lot of upside from here if we do get a closing daily and weekly breakout on strong volume. I like the strong volume that’s already started to move into the stock the past couple of days. Volume on two recent up days has clocked in at 12.4 million and 9.3 million, which is well above the three-month average volume of 7.1 million.
One could be a buyer of the stock once we get the breakout and simply place stop a few percentage points below the breakout level. Make sure you see strong volume if it does break out since that will raise the probability of a much bigger move higher in the future.
Chipotle Mexican Grill
Another stock that has already started to break out is Chipotle Mexican Grill (CMG), which with its subsidiaries operates restaurants throughout the U.S., as well as two restaurants in Toronto and one in London. This stock, one of TheStreet Ratings' top-rated restaurant and hotel stocks, has racked up some solid results so far in 2011, with shares up over 30%.
If you take a look at the chart for Chipotle, you’ll see that the stock closed yesterday above a key overhead resistance level at $289.35 a share. The stock is now following through today and continuing to trade above that breakout price and is printing new all-time highs. Chipotle looks like it's on a collision course with $300 a share and possibly even higher. The only thing we don’t have here is heavy volume on this breakout, but price action should always be the first focus. I would like to see strong volume move into the stock in the coming days to really cement this bullish move.
One could buy this stock on any weakness and simply get out of the trade if it trades a few percentage points back below the breakout level of $289.35. You could also buy some near-the-money or out-of-the money call options a few months out to play a run toward $300 or higher.
Keep in mind that this is heavily shorted stock. The current short interest as a percent of the float for CMG stands at around 9.7% as of May 13. We could really see this stock get squeezed into the end of the quarter since it’s such a big winner and is now breaking out to all-time highs.
If you’re looking for an emerging-markets stock that could be setting up to break out, then take a look at the action Quepasa (QPSA), which owns and operates Quepasa.com, a social network and gaming platform for the Latin community. This stock has trended lower so far in 2011, with shares off by around 30%.
The chart for Quepasa shows that the stock is starting to trade above a key descending trend line that had been acting as resistance on the stock for the past couple of months. This is something that traders need to watch closely on this stock since a strong move above this trend line could signal a bigger move higher is coming for Quepasa.
I would suggest looking for a closing price on Quepasa that puts it above that resistance zone. If you see that, then watch for the stock to start challenging some breakout prices between $8.90 and $9.64 a share. One could buy this stock on a close above the descending trend line that comes on big volume.
I like some of the recent volume on the upside that has already been picking up dramatically. We have had two recent up days where volume was 4.4 million and 2.1 million, which is much, much higher than the three-month average volume of 867,000 shares.
It’s worth noting that this is another stock that’s heavily shorted. As of May 13, the current short interest as a percentage of the float for Quepasa is a rather large 22.5%. The short-sellers have also increased their bets from the last reporting period by 16.5%, or by around 400,000 shares. This stock could see a big short covering rally soon if we do get
I also highlighted Quepasa recently in "Stocks to Play a Social Networking Bubble."
If you’re looking for a breakout play in the pharma space, then take a look at Avanir Pharmaceuticals (AVNR), a pharmaceutical company focused on developing and commercializing therapeutic products for the treatment of central nervous system disorders. This stock is up around 13% so far in 2011.
If you take a look at the chart for Avanir, you’ll see that the stock is quickly approaching a breakout if it can manage to trade above some past overhead resistance at around $4.80 a share. A move above that level would then put the 52-week high into play at $5.80 a share.
What I like about this stocks action in the past month and a half is the strong volume that’s been flowing in on a number of up days. Volume on three recent up days was 19.4 million, 17 million and 14 million, which is dramatically above the three-month average volume of 6.6 million shares.
Market players should now watch for a move and close above $4.80 on strong volume. That should easily put $5.80 into play. I would buy the breakout and use a stop that’s tight in case this is a failed attempt.
This is another heavily shorted stock that could easily get squeezed if we get a breakout. The current short interest as a percentage of the float for Avanir stands at a whopping 27.5% as of May 13. The bears could get caught in a massive short squeeze if Avanir can manage to trade breakout soon. Any move above $5.80 could really send this stock off to the races.
One final breakout candidate that operates in the biotech space is Momenta Pharmaceuticals (MNTA), a biotechnology company specializing in the characterization and process engineering of complex molecules. This stock is off to a hot start in 2011, with shares up over 30%.
If you take a look at the chart for Momenta Pharma, you’ll see that this stock is just starting to challenge some past overhead resistance at around $19.79 to $19.88 a share. A move above those levels would trigger a major breakout for Momenta since the stock has failed at those prices twice recently. I would look for volume on any future breakout that’s well above the three-month average action of 684,000 shares.
I would also like to point out that this stock has been in a very strong uptrend since it fell from $17.40 to $12.32 a share in late January. From the chart, you can see how the stock has been making higher lows and higher highs. I love this potential breakout because it's coming after the stock has consolidated between $18 and those resistance levels I mentioned.
Once again, this is another heavily shorted stock that’s setting up to break out. The current short interest as a percentage of the float for Momenta sits at 18.6% as of May 13. If this does start a big short squeeze, we could easily see this stock hit $23 t o$26 a share, which are the next significant resistance levels.
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.