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5 Stocks Setting Up to Break Out - 64248 views
WINDERMER, Fla. (Stockpickr) -- Despite the selloff in stocks on Thursday, all three major U.S. averages have either started to break out or are within range of breaking out.
The Dow Jones Industrial Average broke out recently above some stiff overhead resistance at around 12,391. We hit 12,450 on Thursday but pulled back to close at 12,409. That’s still above the breakout price of 12,391. What market players should watch for now is a weekly close on the Dow that’s firmly above 12,391. That would be bullish for many of the industrial stocks that litter the Dow.
On the S&P 500, we recently traded above some past overhead resistance at 1332, which is bullish, but we still need to trade above 1344, which is the major breakout level that everyone is watching. If the S&P 500 takes out 1344, then the next level that will come into focus is 1400. I would like to point out that it’s constructive to see that the S&P 500 did close at 1333 on Thursday. If we get the breakout on the S&P, then many market-leading stocks are going to trend higher.
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Technology stocks remain the laggards right now in the market. The Nasdaq did manage to move above some near-term resistance at 2802, but it has still failed to even get close to breaking out above 2840. Plus, the Nasdaq closed at 2796 yesterday, which is below its near-term breakout level of 2802. This doesn’t mean that the Nasdaq won’t join the party if the other two indices break out soon, but it does mean there’s some relative weakness in technology stocks.
It’s very crucial that market players watch how all three major indices behave in the next couple of days and weeks. If U.S. stocks are going to start another trend higher, then we’re going to need to break out with positive price action. It would help if strong volume accompanies any future breakout in U.S. stocks. If we do trade to new highs, then we’re going to see tons of stocks follow the averages and breakout themselves.
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. Following in their footsteps, here's a look at a number of stocks that look poised to break out and trade significantly higher from current levels.
One stock that looks poised to hit a major breakout is OCZ Technology (OCZ), a provider of high-performance solid state drives and memory modules for computing devices and systems. This stock is off to a monster start in 2011 with shares already up 95%. Despite that huge run, the stock looks to be setting up technically for even more gains in the near future.
If you take a look at the chart for OCZ Technology, you’ll see that the stock is starting to move out of a trading channel that it had been locked in for most of the year, ranging from about $7 on the lower end to around $9.35 on the upper end. Now the stock has started to move above $9.35 and break out on huge volume. On Thursday, upside volume was 4 million shares, which is well above the three-month average activity of around 1 million shares.
Related: 10 Tech Stocks With Upside
As I write this, the stock has already traded 7 million shares, with shares up around 4.4%. What’s really bullish about the action in OCZ is that the stock is moving up today after the company announced a stock offering of 10.2 million primary shares at $8.50 a share. Many times stocks will fall to the price offering on a big deal like this, so it’s bullish to see OCZ ripping to the upside.
What’s even more bullish is the fact the stock is now trading at brand new all-time highs. Just about anyone who has ever bought the stock is making money, while most of the shorts are losing money. The trend here is very strong, and OCZ could be setting up to trade significantly higher from current levels.
I would also like to note that OCZ Technology is a heavily shorted stock. The current short interest as a percentage of the float sits at around 10.6% as of March 15. Those shorts have also been increasing their bets from the last reporting period by 25%, or around 553,000 shares. Not much can be worse for a short-seller than being short a stock that’s breaking out to new all-time highs.
Rare Elements Resources
Another stock that’s starting to break out is Rare Element Resources (REE), which engages in the acquisition, exploration and development of mineral properties primarily in Canada and the U.S. Rare Element primarily focuses on gold and rare earth elements. It holds a 100% interest in the Bear Lodge property located in northeast Wyoming. So far in 2011 the stock is off by around 4.7%, but that could be about to change in a big way.
If you take a look at the chart for Rare Element, you’ll see that the stock is starting to break out above some past overhead resistance at around $15.10 a share. On Thursday, this move started to take shape and the volume that moved into the stock was enormous. Over 16.9 million shares traded hands, which is well above the three-month average trading activity of 3.6 million shares.
Related: Rare Earth Metals Stocks Rebounding
If this uptrend in REE continues, then I expect this stock to re-test its all-time high of $17.92 a share. Any move above that level on REE will mean the stock is trading in all-time new high territory. Nothing is more bullish for any stock then when it breaks out to new all-time highs, so watch this name closely.
Keep in mind that this is another heavily shorted stock. The current short interest as a percentage of the float for REE is 23.6% as of Mar. 15. The bears have also been increasing their bets on the stock since the last reporting period by a whopping 46.9% or 2.4 million shares. This high amount of shorts could easily cause this stock to short squeeze to prices that many aren’t even considering.
China GengSheng Minerals
Two low-priced speculative rare earth metals-related stocks that could also be setting up to break out are China GengSheng Minerals (CHGS) and China Shen Zhou Mining & Resources (SHZ). Both of these stocks are favorites among day traders and have been trending higher as the major rare earth metals plays lead the sector.
China GengSheng Minerals is quickly approaching a breakout if the stock can manage to trade above some near-term resistance at around $3.70 to $4.25 a share. If it takes those levels out, then I could easily see this hitting its 52-week high of $6.74.
I would like to note that upside volume expanded dramatically Thursday, with over 2.8 million shares trading vs. the three-month average volume of 1.2 million shares. This move came as the stock bounced solidly off its 50-day moving average of $2.86 a share.
China Shen Zhou Mining & Resources
China Shen Zhou Minerals also looks appealing since the stock has now started to break out above some past overhead resistance at $5.40 to $5.42 a share. Monster upside volume moved into this stock on Thursday, with over 5.1 million shares changing hands vs. the three-month average volume of 2.9 million shares. So far today, volume is tracking in even higher at over 7.3 million shares. This stock looks ready to test its next significant resistance area at around $7 to $7.55 a share. A move above those levels will put $9.40 into focus.
Another stock that looks poised to break out -- and that's trading for under $1 a share -- is Tri-Valley (TIV), which explores for and produces oil and natural gas in California and has two exploration-stage gold properties and a calcium carbonate quarry in Alaska. The company also is involved in drilling rig operations, the operation of precious metal and industrial mineral prospects and crude oil and natural gas drilling and development operations. The stock is off to a hot start in 2011, with shares up around 23%.
If you take a look at the chart for Tri-Valley, you’ll see that the stock has just started to break out above a descending trend line and above its 200-day moving average on big volume. Volume on Thursday clocked in at over 4 million shares, which is well above the three-month average trading activity of 2 million shares. If this stock takes out 77 cents a share, then look for an explosive move that could quickly take it back to its next resistance level of $1.05 to $1.12 a share.
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This is a highly speculative stock, and the company isn’t profitable yet, but the price action in the chart is all that matters. Traders are moving into this name because at the least it’s perceived to be a triple threat with its oil, natural gas and gold operations. If you want to trade this name now, buy it on weakness and use a mental stop just below the 200-day moving average. If it wants to make a monster run, then you’ll be involved, and if it fails, then you can quickly get out and revaluate for another time.
To see more breakout candidates such as Double Eagle Petroleum (DBLE), Express (EXPR) and MAG Silver (MVG), 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.