Utilizing a breakout investment strategy is a natural choice for active investors who settle for nothing less than superlative returns. This involves zeroing in on stocks trading within a tight range and buying them when they step out of this band. In keeping with this approach, they are offloaded whenever they move below this narrow band. If properly implemented, such a strategy could deliver impressive returns.
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.
Is This a Genuine Breakout?
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 genuine 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 7901 stocks to only 10.
Here are the top five stocks that meet these criteria:
Ecopetrol S.A. (EC - Free Report) is a Colombia-based petroleum company. Ecopetrol has a Zacks Rank #1 (Strong Buy) and its average EPS surprise over the last four quarters is 22.2%.
TheStreet, Inc. (TST - Free Report) is a leading web-based provider of original, timely, comprehensive and trustworthy financial news, commentary and information. TheStreet has a Zacks Rank #1 and its average EPS surprise over the last four quarters is more than 100%.
Cogentix Medical, Inc. is a medical device company which designs, develops, manufactures and markets proprietary technologies serving the urology market. Cogentix Medical’s average EPS surprise over the last four quarters is 33.3%. Cogentix Medical carries a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Fortuna Silver Mines Inc. (FSM - Free Report) is engaged in the exploration, mining and development of silver and base metal properties in Latin America. Fortuna Silver Mines has a Zacks Rank #2 (Buy) and its average EPS surprise over the last four quarters is 32.2%.
CPI Aerostructures, Inc. is engaged in contract production of structural aircraft parts and sub-assemblies for the commercial and military sectors of the aircraft industry. CPI Aerostructures has a Zacks Rank #2 and its average EPS surprise over the last four quarters is 43.4%.
You can get the rest of the stocks meeting these criteria by signing up now for your 2-week free trial to the Research Wizard and start using this screen in your own trading. Further, you can also create your own strategies and backtest them first before taking the investment plunge.
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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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