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Breakout Stocks: Sirius, Fortress, Energy XXI - 56407 views
WINDERMERE, Fla. (Stockpickr) -- Sometimes I wonder if the naysayers ever get tired of calling for a significant drop in the market when the current trend on Wall Street is clearly up.
It must be fun to run around and guess what the market is going to do instead of being true to the price action and simply following the trend. The market has had every reason to sell off lately when you consider all of the geopolitical problems that have started to erupt in the Middle East. But it hasn’t sold off. Instead, the market has defied logic and continued to march higher.
This is the type of action you see in a very strong bull market. I suspect that there are a lot of bears and short-sellers out there who are fighting the trend and helping to act as a put on any potential downside. I think the problem with many of these bears is that they’re locked in to trading their opinion over just taking what the market is offering.
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Perhaps I sound overconfident about the current trend, but until the market shows me some significant signs that it wants to go lower, I just can’t give up on a good thing. Sure, the trend could change tomorrow, but until I start seeing an abundance of failed breakouts, or until the market leaders stop leading, I am just not foolish enough to do anything but search for long ideas.
As I search for long ideas, I am going to continue to focus on stocks that are breaking out and look poised to go much 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.
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 some decent upside potential from current levels.
Sirius XM Radio
My first breakout candidate that looks very attractive is Sirius XM Radio (SIRI), which provides satellite radio services in the U.S. and Canada. Sirius offers a programming lineup of around 135 channels of commercial-free music, sports, news, talk, entertainment and traffic and weather. This stock is off to a solid start in 2011, with shares up around 6%.
If you take a look at the chart for Sirius, you’ll see that the stock has started to break out above some past overhead resistance at around $1.74 a share. The stock has also started to print new 52-week highs, with the most recent high at $1.80 a share. This is extremely bullish technical action that market players shouldn’t ignore.
Part of the catalyst for the recent new highs and the breakout is due to positive brokerage note out of Morgan Stanley, which on Wednesday issued an overweight rating on the stock and a $2 price target. Morgan Stanley is looking for Sirius XM to report quarterly earnings on Feb. 15 of $49.7 million, or 1 cent a share, vs. a loss of $25.5 million in the fourth-quarter of 2009. They also said in a note to clients that Sirius XM’s growth in free cash flow and anticipated strong return of capital in 2012 and 2013 will drive the stock higher over the next 12 to 18 months.
This bullish note from Morgan clearly spurred a ton of interest in the stock this week. That interest has brought in dramatically high volume during the last two trading sessions (both up days), when 143 million and 94 million shares changed hands vs. the three-month average trading volume of just 52 million. What’s even more bullish about the technical picture for Sirius XM is that the stock has been making higher lows and higher highs since September 2010. This shows that the stock is in a clear uptrend and the bulls are buying up every dip.
I scan a ton of charts on any given week searching for names that look the strongest technically. It’s hard for me right now to find a better-looking chart in the entire market than Sirius XM's. If you happen to be short this name, or own put options on it, I would strongly suggest you reconsider. Understand that I am not saying it can’t pull back, or that it’s not possible for the uptrend to end. But trading is a probabilities game, and right now, the odds favor much higher prices for Sirius XM.
Fortress Investment Group
Another stock that’s already started to enter the breakout zone is Fortress Investment Group (FIG), a publicly owned investment manager that manages hedge funds and publicly traded alternative investment vehicles. Fortress earns management fees based on the amount of capital it manages, incentive income based on the performance of the funds, and investment income from its principal investment in those funds. This stock is off to a blazing start in 2011, with shares up around 11%.
If you take a look at the chart for Fortress Investment Group, you’ll see that the stock has started to break out above some past overhead resistance at around $5.90 to $6 a share. The recent breakout in this stock has helped to push Fortress to a new 52-week high today at $6.53 a share. This is very bullish action in Fortress, and the current technical picture here bodes well for higher prices.
As in any breakout, the probability of a stock holding it and moving much higher is always increased when it’s accompanied by heavy volume. That’s exactly the case here with Fortress, which saw volume during the last two trading sessions (both up days) of 5.7 million and 2.7 million vs. the three-month average trading activity of 1.5 million. What this tells me is that the big money, or institutional money, is accumulating this stock. Remember that the big players on Wall Street can’t hide their buying in terms of share accumulation because we can identify it on the charts with volume like we’ve here in Fortress.
Think of it as a way to spot when the big money is leaving their forensic footprint when you see price action that is also being confirmed by heavy volume. I don’t know about you, but I want to buy and own what the big boys want, and it looks like the smart money wants some shares of Fortress.
If you like the way the chart for Fortress is setting up, then I will also recommend that you take a look at the chart for its competitor Blackstone Group (BX). Shares of Blackstone Group have started to break out above some past overhead resistance at around $16 to $16.50 a share. Just like with Fortress, Blackstone is breaking out on absolutely enormous volume of 14.5 million shares versus the three-month average volume of 3.6 million.
One final name that has started to enter breakout territory is Energy XXI (EXXI), an independent oil and natural gas exploration and production firm with operations focused in the U.S. Gulf Coast and the Gulf of Mexico. This energy play is off a fantastic start in 2011 with shares up around 13%.
If you take a look at the chart for Energy XXI, you’ll see that the stock has started to breakout above some past overhead resistance at around $29.30 a share. What I love about the technical action in this stock is that the breakout is coming off of a solid basing pattern that occurred near $25 to $26 a share. This basing pattern helped to build a floor in the stock where market players just simply refused to sell this name. This is extremely bullish because it means that the stock built up energy as it based and is now launching off of that base and breaking out.
What’s even more bullish than the basing pattern that offered support on the stock is that this breakout is coming on very big volume. On Thursday, the stock started its breakout move on volume of 2.9 million shares versus the three-month average volume of around 1.1 million shares. Already today, the stock is trading up around 3% and volume is already tracking in at around 1.8 million shares, which again is above the three-month average action.
It’s also worth noting that this stock has a decent short interest with around 6.8% of the tradable float sold short as of Jan. 14. Those shorts could continue to be squeezed out of their bets if energy remains a hot place to be for investors in the markets.
To see more breakout action in stocks, 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.