By Roberto Pedone
Posted on July 9, 2009

Stocks that enter the successful phase of a major breakout can produce some massive profits for those investors lucky enough to be long the name ahead of the move.

A breakout is a significant technical indicator because it demonstrates that a stock is strong enough to trade through a level that represented previous resistance where the stock ran into selling pressure. Previous resistance is often an area where the sellers have taken control of the stock from the bulls. Once the sellers take back control of a stock, they will quickly apply pressure to push share prices lower and prove that the stock wasn’t strong enough to move higher.

That is exactly why a breakout on any stock is so significant. Once a stock builds up enough buying pressure to take out the previous sellers, it usually means the stock has only one place to go, and that’s higher. Sometimes stocks will actually make a breakout and then sell off. This is normally considered a false breakout, so keep in mind that a breakout must be confirmed by the ability of the stock to continue to trend higher and stay above previous resistance levels.

Strong volume is often a great indicator of a real breakout. If a stock can trade above previous resistance and be accompanied by strong volume, it shows that that move has a much better chance of being successful.

Take a look at the chart of Palm (PALM). The stock broke out back in February, but the move wasn’t accompanied by strong volume. Subsequently, the breakout failed, and the stock traded down from $9.50 a share to $5.85. After that selloff, the stock made another attempt at breaking out and was finally successful as the selling volume dried up. Shares are now trading at about $15.30, so you can see that once a stock breaks out, the potential for large gains is great.

Another great example of a successful breakout happened earlier this year with Siga Technologies (SIGA). Shares of SIGA broke out on strong volume above $4.19 and then ran up to $5.86. The stock then pulled back and broke out again above $6 a share on strong volume. The stock eventually went on to hit almost $9 a share. Again, you can see that a successful breakout leads to higher price. Remember that the trend is always your friend, and there is never a good reason to fight a trend unless you like to potentially lose money.

With that in mind, let’s take a look at a few stocks that are either breaking out or that could be setting up to break out and head much higher.

1. WPT Enterprises

First up for a potential breakout stock is WPT Enterprises (WPTE), which develops, produces and markets gaming-themed TV programs and consumer products, including the World Poker Tour.

Looking at the chart below, you’ll see that WPT has been trending beautifully higher in a solid uptrend channel since February. Just take a look at how the stock has been making higher highs and higher lows as shares have risen. Now the stock has started to move sideways in a range of around $1.30 a share to around $1.

Watch for shares to test the previous resistance at $1.30 and $1.50 a share. A breakout above those levels could easily send this stock back towards $2 or possibly even higher. If you’re bullish on this name, it might be worth it to enter the stock at current levels to anticipate the potential breakout. Keep in mind that this stock has a very low float of only about 1 million shares, so if demand were to get serious, this stock could really explode higher.



2. Ivanhoe Mines

Next up is Ivanhoe Mines (IVN), an international mineral exploration and development firm.

Check out this chart below, you can see that Ivanhoe has recently broken out above some key resistance at around $7 to $7.50 a share. This breakout has been accompanied by extremely heavy volume. Volume clocked in at 9 million shares on the breakout vs. the average daily volume of 2 million shares. If this stock can continue to trend higher, it could easily be setting up to test some previous resistance at $12 to $14 a share. That would represent a very big return from current levels.


3. ImmunoGen

Another interesting breakout candidate is ImmunoGen (IMGN). This company is focused on the development of antibody-based anticancer therapeutics.

Take a look at the chart below, and you can see that ImmunoGen has already broken out to five-year highs once the stock cleared $8.85. The stock recently hit $9 a share but has now pulled back a bit, yet it is still in breakout territory. The next key areas for investors to watch with ImmunoGen are around $10 to $11 a share. If the stock can trade above those levels, it could be setting up to test $17.50 a share.



4. American Dairy

The final breakout candidate for today is American Dairy (ADY). This company is a producer and distributor of milk powder, soybean milk powder and related dairy products in the People’s Republic of China.

Looking at the chart below, you can see that American Dairy looks to be setting up to make a run at some previous resistance at $44 a share. The stock has found some solid support at $35.50 to $36 and now looks ready to test that previous resistance. If the stock can manage to break out above $44, it would mark an all-time high. This would mean that anyone who has bought the stock is positive on the name and making money.

There is really no telling how much higher it could trade if shares can successfully trade through $44. Volume is also starting to pick up and easily clear the average daily volume of 181,000 shares. Watch for the selling volume to dry up and buying volume to remain strong. Keep in mind that this stock has a very low float of 8 million shares and a 5% short interest as of June.



Visit the Charts of the Week portfolio to learn about a few more stocks that could be setting up to breakout.

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