One of the most popular methods utilized by active investors is to select breakout stocks. The technique seeks to identify stocks whose prices are fluctuating within a specific band. In case a stock falls below the floor of this band, it may be time to offload it from your portfolio. However, a stock breaking above this channel carries the promise of delivering strong gains.
Spotting a Breakout Stock
The first step to selecting the right breakout stock is to calculate its support and resistance level. A support level is the lower bound for stock movement 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.
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 7876 stocks to only 14.
Here are the top 5 stocks that meet these criteria:
Rosehill Resources Inc. (ROSE - Free Report) is an oil and gas exploration company focusing on acquiring, exploring, developing and producing oil and related natural gas reserves in the Permian Basin. Rosehill Resources has a Zacks Rank #1 (Strong Buy) and its average EPS surprise over the last four quarters is 16%.
Navios Maritime Partners L.P. (NMM - Free Report) is an international owner and operator of dry cargo vessels. Navios Maritime Partners’ average EPS surprise over the last four quarters is more than 100% it and sports a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.
AMC Entertainment Holdings, Inc. (AMC - Free Report) operates as a theatrical exhibition company primarily in the United States and internationally.AMC Entertainment Holdings has a Zacks Rank #2 (Buy) and its average EPS surprise over the last four quarters is 28.4%.
Entercom Communications Corp. is the fourth largest radio broadcasting company in the United States. Entercom has a Zacks Rank #2 and its average EPS surprise over the last four quarters is 23.8%.
Celsion Corporation (CLSN - Free Report) is involved in the development and commercialization of oncology drugs including tumor-targeting treatments using focused heat energy in combination with heat activated drug delivery systems. It has a Zacks Rank #2 and its average EPS surprise over the last four quarters is 29.3%.
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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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