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8 Stocks Setting Up to Break Out - 82128 views
WINDERMERE, Fla. (Stockpickr) -- The entire U.S. stock market is on the verge of a major breakout.
The bears aren’t going to want to hear this, but all three major U.S. indices are within a stone’s throw of taking out their 52-week highs. To put things even more into perspective, this was the best first quarter for stocks since 1998.
The market is defying all logic as it continues to rise in the face of so many negative headlines. The real winners so far have been the dip buyers, who continue to be rewarded with ridiculous profits. Not even skyrocketing crude oil prices or a new war raging in Libya has been able to knock this market down. And as a trend trader, I am going to stick with the trend and continue to stress that the probability for higher stock prices is high.
The path of least resistance for the market is up. That doesn’t guarantee it will go up, but it does give us an edge on how to play the market from here. Of course, having an edge doesn’t mean throwing sound money management or protective downside hedges out the window. You need to be prepared for anything and keep your stops in place.
The area to watch on the Dow Jones Industrial Average for an official breakout now is a close above 12,391. On the S&P 500, the breakout levels to watch are for a close above 1,332 and 1,344, and on the Nasdaq we also need a close above 2,800 and then 2,840.
These are all important levels that market players must pay close attention to. If these levels are indeed taken out on the upside, then the market could trend significantly higher. Why? Simply because short-sellers are most likely going to increase bets in here hoping that the market tops out. If they’re wrong, they’ll be forced to cover those positions which will push stocks higher.
If the bears are right, you’ll know rather quickly because the market will stall out and you’ll see leading sectors and stocks begin to selloff. Again, I think the probability for the bears being right here is low. And what’s great about that is that once the market breaks out, you’re going to see strong-performing equities also break out and soar higher.
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.
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’s quickly approaching a major breakout is Molycorp (MCP) which I also highlighted recently among other inflation-beating stocks to watch. This company is a development stage rare earth oxide producer in the Western hemisphere and owns a rare earth project outside of China. This stock has started to look very bullish of late, with shares up around 20% so far in 2011.
If you take a look at the chart for Molycorp, you’ll see that the stock is approaching a key breakout if it can manage to trade above some past overhead resistance at around $63 a share. If it can trade above that level, it would mark a brand new all-time high for MCP. This means that just about anyone who has bought the stock is making money. More important, it means that the stock is in a very strong uptrend that should bode well for higher prices.
What I really like about MCP here is that huge upside volume has been moving into the stock for the past couple of weeks. I would consider it very constructive if it breaks out soon on volume that’s well above the three-month average volume of 6.1 million shares. If that happens, I see no reason why this stock can’t start a new bullish trend that could easily take it to $100 a share.
In fact, $100 might even be low considering that the stock has a large short interest. The current short interest as a percentage of the float for MCP is 19.2%. Even savvy short-sellers know that it’s normally a very bad idea to stay short a stock that’s printing new highs.
Molycorp is the market leader for the rare earth metals sector. If this stock does break out, then I would suggest looking for more upside action in some of the other sector names. A few worth mentioning are Avalon Rare Metals (AVL), Titanium Metals (TIE) and General Moly (GMO).
Avalon Rare Metals
Avalon has started to see some huge volume come into the stock as it approaches a big breakout at $8.57 a share. In fact, as I write this AVL is punching through that level right now, which puts the stock at an all-time high. I would buy that breakout because I expect short-covering to follow and run this stock significantly higher.
Also watch General Moly for a breakout if the stock pushes above $5.70 to $6 a share and then $6.60 to $7.25 a share. I will note that volume at GMO isn’t anything to write home about. That doesn’t mean GMO can’t run thought if the sector heats up again.
Titanium Metals, one of TheStreet Ratings' top-rated metals and mining stocks, will breakout at $19.75 to $20.70 a share. I discussed the stock in more detail in a recent article about eight stocks that have seen notable insider activity lately.
Another stock that’s coming up on a major breakout is Claude Resources (CGR). This company acquires, explores, and develops precious metal properties, as well as produces and markets minerals in Canada. Claude Resources principally focuses on gold. This stock is off to a solid start in 2011, with shares up around 11%. But those gains are going to look like nothing if this stock does what it technically looks poised about to do.
If you take a look at the chart for Claude Resources, you’ll see that this stock is setting up to potentially trade above $2.60 to $2.90 a share. Both resistance levels are very significant. The $2.60 level has been an area that the stock has struggled to get over for the past two weeks. The $2.90 area is even more key because it marks the all-time high on the stock.
What I love about the technical action in CGR is that the stock has been in a strong uptrend for quite some time. During this uptrend, CGR has been making higher highs and higher lows, and it’s formed a bullish uptrend channel. Another reason to love CGR is because the company is in the right sector at the right time. Gold, as represented by the SPDR Gold Trust (GLD), is only a few points away from breaking out and printing new all-time highs.
Jim Cramer says that half of a stock’s move comes from its sector. I agree, and I completely expect CGR to follow any future strength in gold prices. If CGR breaks out to all-time highs, then I see this name doubling or more from current levels. What’s great about this play is that you can place a stop if you buy now right around the 50-day moving average of $2.37 or even near the uptrend line at around $2.15.
If CGR trades below either level, then you can dump the stock and move on. However, if it starts breaking out above those resistance levels mentioned earlier, then I would add aggressively and look for an explosive move higher.
Market Vectors Coal ETF
Another stock that’s already started to breakout is the Market Vectors Coal ETF (KOL), which looks to replicate as closely as possible the price and yield return performance of the Stowe Coal Index. So far in 2011, this ETF is up around 7.3%. That could simply be just the start of the gains for KOL.
In the aftermath of its natural disaster, Japan is going to demand a ton of energy to rebuild itself. Coal just flat out makes sense because it doesn’t have any of the risks of nuclear energy.
If you take a look at the chart for KOL, you’ll see that this ETF has already started to trade above some major overhead resistance at around $50 a share. This move is technically constructive because its coming as the stock has moved out of sideways trading channel. That channel shows that buyers came in to support the stock at around $45 a share, and there had been resistance at around $50, until now.
Technically, when a stock breaks out of a channel like this, it usually means the stock is entering a new uptrend. What makes me even more confident about this breakout is that it’s coming on huge volume. During the past two trading sessions (both up days), volume was around 1 million and 1.4 million, vs. the three-month average volume of 618,000 shares. That’s telling me that institutional investors are getting into this ETF, and what’s great is that they’re doing it at the breakout point.
So where can KOL trade to next? I would look for the stock to now make a run at its all-time high at around $60 a share. Any move about $60, and I would add to current or new positions, since it could mean it wants to trend higher for some time.
International Coal Group
If this breakout in KOL continues, and I expect it will, then you’re going to see other coal stocks follow suit. One name in the space that technically looks fantastic is International Coal Group (ICO). This company is a producer of coal in the Northern and Central Appalachia.
This stock has been doing nothing but making higher highs and higher lows for the past six months, which is very bullish. Traders should now watch for a breakout if the stock can take out some overhead resistance at around $11.50 a share.
International Coal, which shows up in the portfolio of Prem Watsa's Fairfax Financial Holdings, is highlighted on a recent list of 10 Coal Stocks With Upside.
Another coal stock that looks poised to break out is Patriot Coal (PCX). This company is a producer of coal in the eastern U.S., with operations and coal reserves in Appalachia and the Illinois Basin. Traders should watch for a move above $26.25 and $29.20 a share. If the stock can trade above those levels, then it could set up to make a run towards its next significant resistance level at $40 a share.
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.