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5 Stocks Setting Up to Break Out - 27654 views
BALTIMORE (Stockpickr) – U.S. stocks are rallying for a fifth straight session on Friday and are on track to record their best week in almost a year, after a strong manufacturing number helped to raise investor spirits about the economic recovery.
The best part about the recent move in equities is that it’s happening in the face of such bad news. We’ve all seen the headlines recently which are focused on the Greek debt issues and on even more worries that other European nations will soon be hit with major debt concerns. Plain and simple, the U.S. stock market doesn’t care about the problems in Europe - at least for right now.
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Stocks have been soaring and many names have hit new 52-week highs. Other names are breaking out to new highs and are setting up for potentially huge moves, while others have rebounded huge off of depressed levels. The Dow Jones Industrial Average is now approaching some big resistance at around 12,754.29. Traders should watch for any breakout in the near-term above that level on the Dow. The breakout level to watch for the Nasdaq is 2835.34 and on the S&P 500 it's 1345.20.
With the overall markets now within range of the yearly highs, it’s time to search for stock candidates that are setting up to breakout and trend much higher. 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.
Here ‘s a look at a number of stocks that look poised to break out and potential trade higher from current levels.
One technology stock that has started to form a major breakout is VirnextX Holding (VHC), a development-stage company. VirnexctX is engaged in developing and commercializing software and technology solutions for securing real-time communications over the Internet. This stock is off to a blazing start this year, with shares up over 107%.
If you take a look at the chart for VirnextX, you’ll see that this stock has started to form a major breakout now that it’s moving above some past overhead resistanceat $30.50 a share. This move in the stock is one you shouldn’t ignore because it has pushed VHC into brand new 52-week-high territory. Whenever a stock hits a new 52-week high, it will show up on the radar of momentum traders. Those momentum traders can easily run the stock up from the breakout level because they are dedicated trend followers who love to buy strength.
Market players should now watch for the stock to close above $30.50 on strong volume to confirm that this breakout could have some legs. I would suggest watching for volume that’s greater than the three-month average action of 1.7 million shares. So far today, 1.4 million shares have traded, so watch the volume at the close and for the next few trading sessions.
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It’s worth pointing out that VHC is an extremely shorted stock. The current short interest as a percentage of the float for VHC is a whopping 26.6%. The short-sellers have also been increasing their bets from the last reporting period by 8.4%, or by about 725,000 shares. Nothing is worse for a bear than being short a stock that’s breaking out to new highs. Often times, the stock will run significantly higher as the bears are squeezed out of their positions.
Strategic Hotels & Resorts
Another stock that’s already started to hit a big breakout is Strategic Hotels & Resorts (BEE), a self-administered and self-managed real estate investment trust that engages in the ownership and asset management of upper upscale and luxury hotels in North America and Europe. This is a technically strong stock, with shares up over 35% so far in 2011.
If you take a look at the chart for Strategic Hotels & Resorts, you’ll see that this stock has been making higher lows for the past few months. This is the type of chart pattern that shows large institutional traders are paying up to own the stock every time it dips.
Now the stock is forming even more bullish patterns with shares breaking out to brand new 52-week highs. In the course of that process, BEE has moved above some significant past overhead resistance at $7 a share. This is a move that shouldn’t be ignored by traders since every time the stock has hit $7 or close to it in the last six months, shares have sold off each time.
On Thursday, BEE started its move above that $7 resistance level and closed at $7.08 on big volume. Volume registered 1.9 million shares traded which is well above the three-month average volume of 1.3 million shares. This is a strong signal that the breakout is the real deal and BEE is going to trend much higher from here.
One could buy the breakout on any weakness and simply stop out a few percent under $7 in case this big technical move doesn’t hold.
Strategic Hotels & Resorts shows up on a recent list of 8 Hotel and Resort Stocks With Upside.
If you’re looking for a medical and equipment play that’s starting to break out, then take a look at Accuray (ARAY), which has developed a robotic radiosurgery system, CyberKnife Robotic Radiosurgery System, designed to treat solid tumors anywhere in the body as an alternative to traditional surgery. This stock is off to a respectable start this year, with shares up over 20%.
If you take a look at the chart for Accuray, you’ll see that this stock just recently found some buying interest at a major support zone. Shares of ARAY formed a double bottom and bounced nicely off of some previous support at $6.67 to $6.70 a share. Since hitting $6.70, the stock has run all the way up to over $8 a share.
Now the stock looks poised to head even higher since two major breakouts are about to happen from a technical view. First, the stock is just starting to move above a major downtrend line that dates back to mid-February. This downtrend line has acted as major resistance where the stock has sold off from each time it hit it. Second, shares of ARAY are now starting to break out above some past overhead resistance at around $7.97 to $8.09 a share.
One could be a buyer of this stock above $8.09 and add to any long position above $9 and then $9.64, which are the next major resistance levels. Look for a run back to the 52-week high of $11.16 a share as long as upside volume is expanding into the move. I would like to see volume running higher than the three-month average action of 562,000 shares.
Flexible Solutions International
If you’re looking for a penny stock that’s poised to break out, then check out Flexible Solutions International (FSI), which, together with its subsidiaries, develops, manufactures, and markets specialty chemicals that slow down the evaporation of water. This stock is off to a booming start in 2011, with shares up over 130%.
If you take a look at the chart for Flexible Solutions, you’ll see that this penny stock is starting to setup for a major move higher. Just today, FSI has started to form a big breakout above some pastoverhead resistance at $2.85 a share. The last time that FSI hit $2.85, the stock sold off sharply and fell all the way down to $2.11. Now FSI is breaking out above $2.85 and its happening on very bullish volume.
Volume during the last four trading sessions, which are all up days, has clocked in at 38,200, 56,600, 30,100 and today is already over 41,000. All of these sessions are registering upside volume that’s well above the three-month average action of 25,900 shares. This is a very bullish volume pattern and could be signaling that the stock is about to take off to the upside.
One could simply be a buyer of this stock on any weakness and use a mental stop just below $2.85 in case the breakout fails and doesn’t hold. The next significant resistance area will come into play at $3.50 and then around $4.50 a share, so if this breakout is the real deal, then FSI could run up substantially from current levels.
One more breakout play that’s already started to hit new 52-week highs is Golar LNG (GLNG), the owner and operator of liquefied natural gas carriers and floating storage regasification units. This is another extremely strong stock, with shares up over 142% so far in 2011.
If you take a look at the chart for Golar LNG, you’ll see that this stock is soaring today and breaking out above some past overhead resistance at around $34.75 a share. You can also see on the chart for GLNG that the stock has been making higher lows and higher highs for the past four months as shares ran from $17.42 to its current price of $36.50 a share.
This breakout is a major one for GLNG because not only does it mean new 52-week highs for the stock, but it also moves the stock into all-time high territory. This means that anyone who has ever bought this stock is making money, and the short-sellers are getting annihilated.
One could be a buyer of this stock on any weakness and simply stop out of the trade if you see it fall a few percentage points below $34.75. It could even pull all the way back towards the 50-day moving average of $30.99 and still be inside of a bullish uptrend chart pattern.
To confirm that this breakout might really have some legs, watch for upside volume expansion in the next few days or weeks. I would suggest looking for volume to register above 701,000 shares which is the three-month average volume.
GLNG shows up on a recent list of 6 Stocks to Gain From Strong LNG Outlook.
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.