Picking breakout stocks is probably one of the most popular techniques that active investors utilize. The key to this kind of stock selection is to identify those that are trading within a narrow band. Such stocks are to be acquired as soon as they move above this channel and are sold when they fall below. In case a stock moves above this band, it normally gains momentum.
Spotting Prospective Candidates
In order to identify breakout stocks, you must first determine their resistance and support levels. A resistance level is the barrier which must be broken so as to be identified as a breakout stock. Meanwhile, a support level is the floor for the stock’s movement.
At the breakout level, demand for the stock has peaked, making it a natural choice for traders. On the other hand, when a stock hits the support floor, traders are eager to offload it. In order to spot breakout stocks, you would have to see which of these are on the brink of breaking the resistance barrier or those that have just breached this level.
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 that 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 7867 stocks to only 10.
Here are the top five stocks that meet these criteria:
Summer Infant, Inc. (SUMR - Free Report) is a designer, marketer and distributor of branded durable juvenile health, safety and wellness products, which are sold principally to large U.S. retailers. The company's expected earnings growth for the current year is more than 100%. Summer Infant has a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Intra-Cellular Therapies, Inc. (ITCI - Free Report) is a biopharmaceutical company. The company develops drugs for the treatment of neuropsychiatric and neurologic diseases and other disorders of the central nervous system. Intra-Cellular Therapies has a Zacks Rank #2 (Buy) and its expected earnings growth for the current year is 12.9%.
PDL BioPharma (PDLI - Free Report) pioneered the humanization of monoclonal antibodies and, by doing so, enabled the discovery of a new generation of targeted treatments for cancer and immunologic diseases. PDL BioPharma has a Zacks Rank #2 and its expected earnings growth for the current year is more than 100%.
Cogentix Medical, Inc. (CGNT - Free Report) is a designer, developer, manufacturer and marketer of video endoscopy and fiberoptic products. Cogentix Medical has a Zacks Rank #2 and its expected earnings growth for the current year is 88.9%.
Intrepid Potash, Inc. (IPI - Free Report) is the largest producer of potash in the U.S. and is dedicated to the production and marketing of potash and langbeinite. Intrepid Potash has a Zacks Rank #2 and its expected earnings growth for the current year is 67.1%.
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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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