Choosing breakout stocks is probably one of the most popular techniques used by active investors. The logic behind this selection strategy is to identify stocks that are trading within a narrow band. Such stocks are to be purchased as soon as they move above this channel and sold when they fall below. In case a stock moves above this band, it usually gains momentum.
However, market watchers often caution against timing such a move incorrectly. This is because there is a significant risk of identifying stock movements as breakouts, even when this is not the case. At the same time, when utilized correctly, this strategy yields substantive gains, which is the reason for its enduring popularity.
Determining Breakout Levels
The first step to selecting the right breakout stock is to calculate its support and resistance level. A support level is the lower bound for stock movements while a resistance level refers to the maximum price which it trades within over a considerable period.
In other words, the demand for a stock is at its lowest at its support level, which means most traders are willing to sell it. At the resistance level, most traders are willing to go long on the stock, which means that they would like to add them to their portfolios. The key to identifying breakout stocks is to zero in on those that are on the verge of a breakout or those that have just broken above the resistance level.
Has a Genuine Breakout Occurred?
The primary risk associated with such a strategy is that the decision to buy an apparent breakout candidate has been incorrectly timed. When a stock moves above the resistance level, it should be a highly prized commodity for traders. However, whether such a breakout is at all genuine is another matter altogether.
For a bona fide breakout, the stock’s earlier resistance barrier should become its new support level. This only happens if the trading channel that has been established is tested by observing the long-term price trends. The strength of the support and resistance levels can be ascertained only through such a study. Despite the risk of misidentification, correctly identifying such stocks can yield considerable returns, even at a price which may not seem attractive at the first glance.
Percentage price change over four weeks between 10% and 20% (Stocks which are showing considerable price increases, but whose gains are not excessive.)
Current Price /52-Week High greater than or equal to 0.9 (Stocks which are trading 90% close to their 52-week highs.)
Zacks Rank less than or equal to #2 (Only Strong Buy and Buy rated stocks can get through.)
No matter whether the market is good or bad, stocks with a Zacks Rank #1 (Strong Buy) or 2 (Buy) have a proven history of outperformance. You can see
. the complete list of today’s Zacks #1 Rank stocks here
Beta for 60 months less than or equal to 2
(Stocks which move by a greater degree than the broader market but within a reasonable limit.)
Current price less than or equal to $20 (Stocks which are reasonably priced.)
These criteria narrow down the universe of more than 7,681 stocks to only 17.
Here are five of the 17 stocks that passed the screen:
Costamare Inc. ( CMRE Quick Quote CMRE - Free Report) owns and charters containerships to liner companies. It carries a Zacks Rank #1. The company’s expected earnings growth rate for the current year is more than 100%. First BanCorp. ( FBP Quick Quote FBP - Free Report) is the bank holding company for FirstBank Puerto Rico. The company carries a Zacks Rank #2 and has an expected earnings growth rate of more than 100% for the current year. Whitestone REIT ( WSR Quick Quote WSR - Free Report) is a fully integrated real estate investment trust that acquires, owns, manages, develops and redevelops high quality internet-resistant neighborhood, community and lifestyle retail centers. It carries a Zacks Rank #1 and has an expected earnings growth rate of 8.6% for the current year. JMP Group LLC ( JMP Quick Quote JMP - Free Report) is a full-service investment banking and asset management firm that provides investment banking, sales and trading, and equity research services. The company has a Zacks Rank #2 and an expected earnings growth rate of 31.8% for the current year. BCB Bancorp, Inc. ( BCBP Quick Quote BCBP - Free Report) is the bank holding company for BCB Community Bank. The company has a Zacks Rank #2 and an expected earnings growth rate of 52.2% for the current year.
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Click here to sign up for a free trial to the Research Wizard today. Disclosure: Officers, directors and/or employees of Zacks Investment Research may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material. An affiliated investment advisory firm may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material. Disclosure: Performance information for Zacks’ portfolios and strategies are available at: https://www.zacks.com/performance .