Investors with an active approach often utilize a breakout investment strategy in their quest for appreciably high returns. This involves zeroing in on stocks trading within a tight band and buying them when they move out of this band. In keeping with this approach, such stocks are sold whenever they move below this narrow band. If properly implemented, such a strategy has the ability to deliver impressive returns.
Identifying Breakout Stocks
The essence of this strategy lies in calculating the support and resistance levels of a stock. The lower bound 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 ceiling 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.
Has a Breakout Really 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 $20 (Stocks which are reasonably priced.)
These criteria narrow down the universe of over 7877 stocks to only 11.
Here are the top five stocks that meet these criteria:
Summit Therapeutics plc (SMMT - Free Report) is a biopharmaceutical company which discovers, develops and brings to the market unique medicines designed to treat genetic and infectious diseases. Summit Therapeutics has a Zacks Rank #1 (Strong Buy) and its expected earnings growth for the current year is 88%.
Commercial Vehicle Group, Inc. (CVGI - Free Report) supplies interior systems, vision safety solutions and other cab-related products for the global commercial vehicle market. The company's expected earnings growth for the current year is 51.7%. It carries a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.
DragonWave Inc. is a leading provider of high-capacity packet microwave solutions that drive next-generation IP networks. DragonWave has a Zacks Rank #2 (Buy) and its expected earnings growth for the current year is 47.7%.
Townsquare Media, Inc. (TSQ - Free Report) is a local media and entertainment company. Townsquare Media has a Zacks Rank #2 and its expected earnings growth for the current year is 6.2%.
CONSOL Energy Inc. (CNX - Free Report) is a multi-fuel energy producer and an energy services provider, primarily catering to the U.S. power producers. CONSOL Energy has a Zacks Rank #2 and its expected earnings growth for the current year 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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