Possibly the single most popular method utilized by active investors is to identify breakout stocks. This method seeks out stocks whose prices vary within a tight range. In the event of a stock declining below the floor of this channel, it may be time to offload it from your portfolio. But if a stock manages to rise above this channel, it holds the possibility of delivering strong returns.
Identifying Breakout Stocks
The first step to selecting the right breakout stocks is to calculate their support and resistance levels. 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, 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 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 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.)
• 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 $15 (Stocks which are reasonably priced.)
These criteria narrow down the universe of over 7,700 stocks to only eight.
Here are the top five stocks that meet these criteria:
ACCO Brands Corporation (ACCO - Free Report) is a world leader in branded office products. It has a Zacks Rank #1 (Strong Buy) and its average EPS surprise over the last four quarters is 23.9%
Cloud Peak Energy Inc. (CLD - Free Report) is a producer of low sulfur, high quality, sub-bituminous coal in the U.S. It has a Zacks Rank #1 and its average EPS surprise over the last four quarters is more than 100%. You can see the complete list of today’s Zacks #1 Rank stocks here.
Celestica Inc. (CLS - Free Report) is one of the largest electronics manufacturing services company in the world, serving the computer, and communications sectors. Celestica has a Zacks Rank #2 (Buy) and its average EPS surprise over the last four quarters is 32.5%.
KeyCorp. (KEY - Free Report) provides a wide range of products and services, such as commercial and retail banking, commercial leasing, investment management, consumer finance as well as investment banking products to individual, corporate and institutional clients throughout the U.S. It has a Zacks Rank #2 and its average EPS surprise over the last four quarters is 2%.
American River Bankshares (AMRB - Free Report) is the parent company of American River Bank, a regional bank in Northern California. It has a Zacks Rank #2 and its average EPS surprise over the last four quarters is 10.3%.
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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.
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