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6 Stocks Poised for a Breakout - 29112 views
The bears just can’t keep this market down. Almost every sector, aside from the banking stocks, is uptrending nicely. The broader U.S. averages are quickly approaching some key price points that could signal a breakout trade. Market players should keep an eye on the 1220 level for the S&P 500 and the 11,250 level for the Dow Jones Industrial Average.
As for the Nasdaq, this index is showing the most strength and is quickly approaching a breakout at the 2535 area. If the Nasdaq can manage to breakout soon, it could take the entire market with it to much higher prices.
However, there is the risk of a sell-the-news reaction as we approach the mid-term elections and the much-anticipated post-elections Federal Reserve meeting. It’s very possible that the potential for QE2 is already priced into the market. Time will tell, and the U.S. dollar will be the key to how the market wants to trade.
Bottom line: The market will most likely trade in the inverse to the U.S. dollar. If you’re trading this market (long or short), you’re doing yourself a disservice if you’re not watching the dollar like a hawk. I continue to believe it will be the tell for the direction of equities markets as we move into November.
Trading breakouts is not a new game on Wall Street. This strategy has been pioneered by legendary traders such as William O’Neal, Stan Weinstein and Nicolas Darvas.
A breakout occurs when a stock makes a move through a significant level of support or resistance, which is usually followed by heavy volume and increased volatility. Wall Street players love to see an upside breakout because it demonstrates strength in the underlying asset as the price breaks above a level of previous resistance. An upside breakout can also take a stock to new highs, which will generate a lot of interest as the stock shows up on sophisticated software that scans for this type of action.
Here ‘s a look at a number of solid breakout stock candidates that could have big upside potential.
The first stock, which seems to keep breaking out on a weekly basis, is Priceline.com (PCLN), an online travel company that offers a range of travel services, including hotel rooms, car rentals, airline tickets, vacation packages, cruises and destination services.
This stock continues to be a leader of the current market rally, with shares up an unbelievable 62% in the last three months. Clearly, consumers are flocking toward Priceline.com to shop for discounted travel deals in this challenging economic environment.
Looking at the chart, you’ll see that shares of Priceline.com have now started to break out above some previous overhead resistance at around $358 a share. The last time this stock was trading up near these levels was back in 2000. If this strength continues in Priceline.com, then shares could easily print $400 very soon.
It’s worth noting that the shorts are heavily involved in this stock, with around 6.4% of the tradable float of 47 million shares sold short as of Sept. 30. The bears could be taking a big risk here shorting Priceline.com ahead of the company’s earnings report set for Nov. 8. If the company reports a solid quarter, I expect a major short squeeze to follow.
>>Also: 21 S&P Stocks Up More Than 40%
Wall Street seems to be getting behind the idea of a strong quarter in the future for Priceline.com. Last Friday, RBC Capital Markets published a report that predicted the company would top earnings estimates due to a rebound in hotel stays and European travel. The best trade going into earnings might be to buy out-of-the-money call and put options so you can capture a big move either way. Keep in mind though that the trend is clearly up for this stock.
Another stock that is starting to see some breakout action is Under Armour (UA), which develops, markets and distributes performance apparel, footwear and accessories.
If you take a look at the chart, you’ll see that shares of Under Armour are starting to break out above some previous overhead resistance at around $48 a share. You can also see on the chart how Under Armour is now solidly trading in bullish uptrend price channel. If this breakout is the real deal, then I expect Under Armour to easily trade towards the high-end of the uptrend channel which would put the stock into the mid-$50s or higher.
Keep in mind that this company will report earnings on Oct. 26, so any further upside will depend on the company's reporting a solid quarter and bullish guidance for the future. It’s also worth noting that a whopping 30% of the tradable float of 35 million shares is sold short as of Sept. 30. I would be a very nervous bear shorting this chart into earnings, especially considering how crowded of a short trade we have here.
Bottom line: The strength in Under Armour’s price action combined with that huge short interest could spark a massive short squeeze rally if the company can deliver what the bulls on Wall Street want to hear. I fully expect this stock to make a huge move following earnings. Just like Priceline.com, it might be a good trade to buy out-of-the-money call and put options to capture a big move either way. But once again, the trend here is clearly up.
One final breakout candidate you should put on your trading radar is Starbucks (SBUX), which engages in the purchase, roasting and sale of whole bean coffees worldwide.
Shares of Starbucks are benefiting from a global crop shortage that has pushed coffee futures towards highs last seen in 2008. Coffee futures are up over 40% year-to-date, and some analysts are predicting record highs that could push futures above $3.35.
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If you take a look at the chart, you’ll see that Starbucks is starting to break out above some previous overhead resistance at around $28.35 a share. This breakout is occurring on very heavy volume, which lends to the credibility of the move and to the bull case for the stock. During the last two weeks, two large up days on the stock (both key moves off pivot points) saw volume come in at 14 million and 11.3 million, which is well above the three-month average daily volume of 7.5 million shares.
Also, if you glance at the chart, you’ll see that the stock has been trading in a beautiful uptrend channel since August. If this breakout continues, then I expect the stock to easily move above the higher-end of the channel and enter a new bullish phase.
This bullish volume and price action for Starbucks has now officially pushed the stock into trading levels last seen back in 2007. The company is due to report earnings on Nov. 4. Judging by the way the stock is acting, the report could be a very good one for the bulls.
>>Who Owns Starbucks?: Mark Hillman
To see more breakout action in stocks such as Buffalo Wild Wings (BWLD), Cracker Barrel Old Country Store (CBRL) and Sina.com (SINA), check out the Breakout Stocks of the Week portfolio on Stockpickr.
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.