Picking breakout stocks is probably one of the more basic techniques used by active investors. The logic behind this kind of stock selection is to determine which stocks are trading within a narrow channel. Such stocks are to be purchased as soon as they move above this band and are sold when they fall below. In case a stock moves above this band, it usually gains momentum and offers the promise of considerably high returns.
Determining Breakout Levels
The key to this strategy is calculating the support and resistance levels of a stock. The floor of a stock’s trading channel is its support level and it should be sold as soon as it threatens to fall lower. On the other hand, the resistance is a stock's breakout level and it can gain substantially if it breaks the resistance level.
When a stock is close to its support level, demand is literally hitting the floor. On the other hand, demand rises when it is breaching its resistance level, signaling the right time to make a lucrative addition to your portfolio. The idea is to pick stocks which have just broken above their resistance barriers or are very closing to doing so.
Verifying Whether It’s for Real
Stocks which have breached their resistance level should ideally be in high demand among traders. But the test of whether this is a genuine breakout is whether they go on to attain higher prices and the old barrier becomes a new support. This is why it is important to determine whether a long-term price trend is about to emerge.
Only a study of long-term trends can determine whether the existing trading channel has been breached effectively. This indicates the strength of the support or resistance levels. If you can identify the effective channel for a stock, picking it even at a not-so-reasonable price would give you significant returns.
• 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 tot heir 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 31.
Here are the top 5 stocks that meet these criteria:
Reading International, Inc. (RDI - Free Report) is engaged primarily in the ownership and management of entertainment and other real estate assets. It has a Zacks Rank #1 (Strong Buy) and its average EPS surprise over the last four quarters is more than 100%.
CDI Corp. is a provider of information technology, staffing and engineering solutions. It has a Zacks Rank #1 and its average EPS surprise over the last four quarters is 34.5%. You can see the complete list of today’s Zacks #1 Rank stocks here.
IntraLinks Holdings, Inc. (IL - Free Report) is a global provider of Software-as-a-Service solutions for securely managing content, exchanging critical business information and collaborating within and among organizations. IntraLinks has a Zacks Rank #1 and its average EPS surprise over the last four quarters is 88.9%.
KVH Industries Inc. (KVHI - Free Report) is a leading provider of in-motion satellite TV and communication systems. It has a Zacks Rank #1 and its average EPS surprise over the last four quarters is more than 100%.
Marvell Technology Group Ltd. (MRVL - Free Report) is a fabless designer, developer and marketer of analog, mixed-signal and digital signal processing integrated circuits. It has a Zacks Rank #1 and its average EPS surprise over the last four quarters is more than 100%.
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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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