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5 Stocks Setting Up to Break Out - 17243 views
WINDERMERE, Fla. (Stockpickr) -- Following a drop of more than 400 points on the Dow on Thursday, U.S. equity markets continue to swing wildly on Friday as investors pile right back into the gold trade.
As of most recent check, the Dow was off by around 110 points at 10,880.08, and the S&P 500 was down by 10.69 points at 1129.96. The tech-heavy Nasdaq was also lower, by 23 points at 2357.38. At one point during today’s session, the Dow was trading over 11,000, so you can see that volatility continues on Wall Street.
Strong demand for gold has propelled gold to a series of record highs as market players worry over the potential for a worldwide recession. Many traders are also concerned that a European bank may soon collapse Lehman-style if that region is hit with a widespread banking meltdown. Europe has tried to stem the banking problem by banning short-selling on bank stocks on a number of major exchanges. There was a similar attempt in the U.S. during our banking crisis in 2008, but it failed to stop U.S. bank stocks from plunging dramatically.
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Gold soared as high as $1,881.40 an ounce during today’s trading session. This record high has now put the yellow metal up over 30% so far in 2011. The strength in gold has also pushed a number of gold miner stocks into new 52-week-high territory. Gold mining players such as Yamana Gold (AUY), New Gold (NGD) and Randgold Resources (GOLD) have all printed new 52-week highs today as gold has soared.
The top traders in the world know that markets are made up of thousands of stocks and tons of sectors. With so many moving parts, there’s always some sector or stock that’s acting strong, doing its own thing and staging a breakout.
With that in mind, here's a look at a number of stocks that look poised to break out and trade higher from current levels.
One stock that’s quickly approaching a major breakout is GameStop (GME), a multichannel retailer of video game products and personal computer entertainment software. This stock hasn’t done much so far in 2011, with shares off by around 4%.
The company reported a weak second quarter on Thursday, announcing that earnings fell 15.4% to 22 cents per share vs. 26 cents per share in the prior-year quarter. But GameStop told a good story about the future, saying that the holiday season should be strong due to hot games such as Call of Duty and Modern Warfare 3.
If you take a look at the chart for GameStop, you’ll see that this stock has started to break out above a key descending trend line that started back in late June. This trend line has marked a big resistance level on the stock for the past two months, so now that the stock has started to trade above it, it could mean a major trend change is at hand.
Another major positive here for GameStop is that upside volume has started to pick up dramatically as the stock has run from $18.30 a share to its current price of just under $22. Volume yesterday was 14 million, and volume today has already clocked in at 5.2 million, which is well above its three-month average of 4.2 million.
One could be a buyer of this stock once it clears its 200-day moving average of $22.93 a share on solid volume. I would add to any long positions after it then trades above its 50-day moving average of $24.25 a share. I would use a mental stop just below $21 in case this stock isn’t ready to start a new bullish trend change.
Keep in mind that this is a heavily shorted stock that could easily get squeezed dramatically higher from here if the bulls gain full control. The current short interest as a percentage of the float for GameStop is massive 25.1%. In fact, I included the stock this week on a list of earnings short-squeeze plays.
Qihoo 360 Technology
Another stock that market players should put on their breakout radar is Qihoo 360 Technology (QIHU), which is engaged in the operations of Internet services and sales of third party anti-virus software in the People's Republic of China. It provides Internet and mobile security products in China. This stock is off to a weak start so far this year with shares off by around 27%.
On Thursday, this company posted a solid earnings beat of 11 cents per share for the second-quarter versus Wall Street estimates of 6 cents per share. Revenue came in at $35.1 million versus estimates of $29.12 million. (I also featured Qihoo this week in "5 Heavily Shorted Stocks That Could Pop on Earnings.")
If you take a look at the chart for Qihoo 360 Technology, you’ll see that this stock is quickly approaching a big breakout if it can manage to trade and close above $25.75 a share. Earlier today, the stock did touch $26.08, but it has since then pulled back to just under $25 a share. What traders should watch for now, is for Qihoo to close above $25.75 on big volume. Look for volume that’s close to or well above its three-month average action of 918,000 shares.
I would only buy this stock for a breakout play if you see it clear $25.75 intraday on big volume, or if you see it close above $25.75 with solid volume. If we see either of those two scenarios, I would buy the stock and look for a run towards $30 a share, or possibly even higher. This previous resistance level at $25.75 has acted as a brick wall for this stock for the past three months. That’s why a move and close above it should spark a big upside move for Qihoo.
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If you’re looking for a market leader that could be setting up to breakout, then take a hard look at Zagg (ZAGG). This company designs, manufactures and distributes protective coverings, audio accessories and power solutions for consumer electronic and hand-held devices under the brand names invisibleSHIELD, ZAGGaudio and ZAGGskins. This stock has been on fire in 2011, with shares up over 92%.
If you take a look at the chart for Zagg, you’ll see that this stock recently hit some major overhead resistance at around $16.90 to $17.10 a share. Zagg has failed around this level a number of times during the past two months. That said, I still think the stock is worth putting on your breakout radar since the trend remains up for Zagg. It would now be constructive to see Zagg hold above its 50-day moving average of $14.22 a share -- or at least above $13.67 a share, which is a recent support zone.
As long as those levels hold, it might be a good idea to get long some shares of ZAGG on any weakness and anticipate a run back towards those resistance levels at around $17 a share. I would simply use a tight mental stop below $13.67 or around the 50-day moving average of $14.22. I would then add big to any long positions if you see Zagg take out $17.10 on heavy volume. Look for a breakout on volume that’s either close to or well above its three-month average of 2.3 million shares.
This is a heavily shorted stock with over 74.1% of the tradable float sold short by the bears. If you see a Zagg breakout hit soon with volume, I would be all over this trade since the potential for a massive short squeeze is well within reason.
If you’re looking for a breakout trade in the gold and silver sector, then take a look at AuRico Gold (AUQ), a mining company that is also engaged in the exploration for and development of gold and silver deposits in Mexico. This stock is off to a hot start in 2011, with shares up over 37%. Much of that strength is due to the strong action we have seen in the underlying commodity known as gold, which is up over 30% so far in this year.
If you take a look at the chart for AuRico Gold, you’ll see that this stock is quickly approaching a big breakout if it can manage to trade and close above some past overhead resistance at around $13.60 a share. Earlier in today’s trading session, the stock hit $13.70 a share, so now traders should watch for a closing price in the coming days or weeks above that level on big volume. I would suggest looking for volume that’s close to or well above its three-month average action of 1.76 million shares.
One could be a buyer of this stock for a breakout trade once you see that close with volume above $13.70 a share. This stock’s all-time high is just over $18 a share, so if we get the breakout, then this stock could trade up to those levels easily from here. I would simply use a mental stop just below $13.70 in case the breakout fails, so you’re protected against a sharp pullback.
One more stock worth eyeing for a breakout trade is Limelight Networks (LLNW), a provider of content delivery network services. If you’re looking for a depressed stock that has the chance to bounce big, check out this one, which is by over 60% so far in 2011.
If you caught my breakout article last week, then you will notice that Limelight’s chart is very similar to Motrocity's (MOTR). Shares of Motricity exploded higher on Monday by over 25% after that stock broke out of a similar pattern.
If you take a look at the chart for Limelight Networks, you’ll see that this stock has been stuck in a nasty downtrend from the past six months falling from a high of $7.39 a share in late April to its current price of just under $2.30 a share. During that entire slide, the stock never once gave you a reason to buy it since it was clearly making higher lows and lower lows. This demonstrates that the trend was down and traders were selling rallies and pullbacks aggressively. The stock was also failing at its 50-day and 200-day moving averages on a regular basis. This was also a sign it was being distributed by large traders.
That was then though and this is now, and stocks don’t fall forever unless the company is going bankrupt. What we can see now is that shares of LLNW have found some buying support at around $1.95 to $2.04 a share on big volume. A number of recent up days have seen volume come in well above its three-month average action of 2.1 million shares.
This big volume is following a major gap down on the stock from a few weeks ago where shares fell from over $3.50 a share to its recent low of $1.95 a share. That recent gap down could be signaling a short-term bottom for the stock since shares have started to stabilize and heavy upside volume is moving in.
One could be a buyer of this stock above $2.45 to $2.50 and stop out if it trades a few percentage points below that level. A move above those levels will mean the stock is breaking out above its gap down day high price. When this happens, a stock can bounce huge and fill some of that gap as short-sellers lock in profits and buy the stock back for the bounce. Be prepared for Motrictiy-type move if you see LLNW break above those levels with volume.
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.