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5 Stocks Setting Up to Break Out - 21226 views
WINDERMERE, Fla. (Stockpickr) --U.S. stocks were trading choppily between modest gains and losses on Friday as market players remained cautious following the previous session’s massive drop in equity prices. Clearly, traders remain concerned about the state of the global economy and the unresolved debt crisis resolved in Europe.
As of most recent check, the Dow Jones Industrial Average was trading down by 13 points to 10,721, and the S&P 500 was trending up 5 points to 1,135. The tech-heavy Nasdaq was up by 16 points to 2,470.
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From a technical perspective, traders need to keep a close eye on some major technical levels on the broad indexes in the coming days and weeks. A break and close below 10,604.07 on the Dow should be considered very bearish since that level marks the August lows. A move below that level on big volume could easily set the Dow up to test its next significant previous support level at 9936.62. Traders should watch the 1101.54 level like hawks on the S&P 500. A move and close below that level with volume could set the S&P 500 to test its next previous support zone at 1039.70.
That said, if the levels I mentioned do hold in the coming days and weeks, then look for a sharp short-covering rally to take hold. Be prepared to trade the market either way based off of what the major averages due at these key support zones.
With so many moving parts in the market, there’s always some sector or stock that’s acting strong and setting up to breakout. 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 trade higher from current levels.
One stock setting up to break out is Rambus (RMBS), a property and technology licensing company focused on the creation, design, development and licensing of patented innovations, technologies and architectures that are foundational to all digital electronics products and systems. This stock has been smacked down by the bears this year, with shares off by around 32%.
If you take a look at the chart for Rambus, you’ll see that this stock just put in a monster run from its August low of $9.78 a share to its current price of just over $13.50 a share. During that big run, the stock has been flashing some bullish signs with shares printing higher lows and higher highs. The stock is now quickly approaching a big breakout that could be worth trading.
Market players should now watch for a breakout on Rambus if the stock can manage to sustain a move above some near-term overheadresistance at $13.82 a share on solid volume. Look for volume that’s tracking in close to or well above its three-month average action of 1.6 million shares. It would also be constructive if we get this breakout move and the stock closes above $13.82, not just takes it out intraday.
If you’re bullish on this name, then one could be a buyer of this stock once it clears $13.82 onsolid volume. If we get this move I would look for a run in RMBS back towards $16 to $17 a share or possibly even higher if the bulls gain full control of this stock. I would simply use a stop just below $12.84 a share which is the 50-day moving average or much tighter if you are trading this on a more short-term basis.
Keep in mind that this stock has a notable short interest since 8.9% of the tradable float is sold short by the bears. If this stock breaks out in the coming weeks or days again, then watch for a high volume move that could lead to a solid short-squeeze.
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Another breakout trade could be setting up for Cepheid (CPHD), a molecular diagnostics company that develops, manufactures and markets fully integrated systems for testing in the clinical market. This stock has been ripping so far in 2011, with shares up over 64%.
This stock is acting very strong today after Goldman Sachs upgraded the shares based on new product opportunities, increased global testing and top-line growth. Goldman raised its price target on the stock from $36 to $45 a share. At last check, shares of Cepheid are up 7.8% off the Goldman call.
If you take a look at the chart for Cepheid, you’ll see that this is a very strong uptrending stock that’s been printing higher lows and higher highs for the entire year. An investor could have bought this stock of just about any dip in the last year and made money. Now Cepheid is approaching a major breakout that if triggered could make trades some big coin.
Market players should put this stock on their radar for a breakout move above $39.68 and then $40.98 a share, which is the stock’s all-time high. A sustained move above those levels that comes on high volume could easily set this stock up for another monster trend higher. I would suggest watching for a move that comes on volume that’s tracking in close to or above its three-month average volume of 707,400 shares.
Once could be a buyer of this stock off any significant weakness in anticipation of the breakout or simply wait for the breakout to trigger above $41 a share. Either way you trade this, make sure to use a tight stop in case the stock isn’t ready to take out its all-time highs. Keep in mind that this stock is heavily shorted since 12% of the tradable float is sold short by the bears. If we get the breakout, then we could easily see short-covering push this name significantly higher in the near future.
A stock in the biotechnology sector that looks ready to break out is MannKind (MNKD), a biopharmaceutical company focused on the discovery, development and commercialization of therapeutic products for diseases such as diabetes and cancer. This stock has taken it on the chin so far in 2011, with shares off by over 55%.
This stock is ripping higher today by over 10% after the company said it has confirmed with the FDA design of two clinical studies to evaluate the efficacy and safety its diabetes candidate, Afrezza. This spike in the stock is coming on solid volume, with over 960,000 shares traded at last check versus its three-month average volume of 932,000 shares.
If you take a look at the chart for MannKind, you’ll see that this stock has been flashing some very bullish signs with shares printing higher lows and higher highs since it hit its August low of $2.20 a share. The stock actually formed a double bottom after testing that $2.20 area twice in August and has since then ripped higher to its current price of just over $3.60 a share.
Market players should watch for a breakout trade if MNKD can manage to trade and close above $3.53 on solid volume. If we get the close today above $3.53, and it looks likely with the stock currently trading above that level, then this stock could easily be setting up for a big run back towards $4 to $4.40 a share (its 200-day moving average) – or possibly even higher.
You could be a buyer of this stock above $3.53 a share or you could also buy it off any weakness with a stop just below the most significant near-term support at $3.25 a share. I would add to any long position once this stock takes out $4 a share on heavy volume.
This stock has an extremely high short interest with 31.2% of the tradable float sold short by the bears. It’s worth pointing out that the bears have been increasing their bets from the last reporting period by 8.5%, or by about 1.9 million shares. With so many bears leaning all over this stock, any breakout in the coming weeks or days could easily set this name up for a huge spike higher.
Another potential breakout play in the biotech sector is Cytori Therapeutics (CYTX), which develops, manufactures and sells medical products and devices to enable the practice of regenerative medicine. The bears have hammered this stock so far this year, with shares off by around 34%.
This stock was hit with some major news today after the company announced it has entered into a Celution System agreement with Apollo Hospitals, one of Asia’s largest private health care groups, to offer the technology initially at select cosmetic surgery centers in India. This news has spiked the stock up over 8%, but that could just be the start if the bulls really move into this name.
If you take a look at the chart for Cytori Therapeutics, you’ll see that this stock has been hammered down from its April highs of $7.72 a share to a recent low of $2.32 a share. Since hitting that low in early August, the stock has jumped up to its current price of just over 3.30 a share. For the last month and half, this stock has been stuck in a range bound trading pattern between $2.90 and $3.70 a share.
Market players should now watch for a breakout trade to trigger if CYTX can manage to trade above the upper end of the range at $3.50 and then $3.72 a share on heavy volume. Look for volume that’s tracking in close to or above its three-month average volume of 451,900 shares. A move above those levels should set this stock up for a run back towards $4.50 or possibly even $5.40 a share, which is the 200-day moving average.
Related: 8 Biotech Stocks to Watch
One could be a buyer of this stock on any weakness in anticipation of the breakout and simply use a stop just below $3.04 a share in case it’s not ready to go. Obviously, keep that stop much tighter if you’re day trading this call. You could also just buy the stock off strength and jump in long once it takes out $3.57 to $3.72 with volume.
This is another stock with a high short interest, with 18.2% of the tradable float currently sold short by the bears. If you see the breakout in the coming days or weeks, then be ready to trade this since the bears will feel pressured to do some covering.
One more breakout candidate is chemical manufacturing player Amyris (AMRS), an integrated renewable products company, offers renewable compounds for a variety of markets. It builds and applies its industrial synthetic biology platform to provide alternatives to select petroleum-sourced products used in specialty chemical and transportation fuel markets worldwide. This stock is off to rocky start in 2011, with shares off by around 25%.
If you take a look at the chart for Amyris, you’ll see that this stock was whacked by the bears dropping from its June high of $30.78 a share to its recent low of $17.57 a share. That huge drop has now moved the stock into a sideways trading pattern between $17.50 and $21 a share. What I love about sideways trading patterns, is that the once the stock breaks either way out of the pattern it will often define the next trend for the shares.
Market players should now watch for a big breakout in Amyris if the stock can manage to trade above $20.80 (its 50-day moving average) and then $21 a share on big volume. Look for volume that’s tracking in close to or well above its three-month average action of 231,200 shares. Don’t ignore this breakout because if we do get it, then this stock has a ton of upside potential. I would target a run back towards $25 or $27 a share if we get the breakout with strong volume.
You could be a buyer of this stock once it takes out $21 a share and simply use a stop just below that level in case the breakout fails. You could also but this name off any weakness and anticipate the breakout with a tight stop just below $19 a share.
This is also a heavily shorted stock with over 12.6% of the tradable float sold short by the bears. The short-sellers have also been increasing their bets from the last reporting period by around 11.6%, or by about 296.800 shares. The bears have a huge win here, so if this stock breaks out soon, look for them to cover and buy the stock back to lock in some profits.
-- 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.