Picking breakout stocks is one of the most favored methods for those utilizing an active investing approach since this strategy offers the promise of superlative returns. This method involved zeroing in on those stocks whose prices are varying within a narrow band.
If the price of the stock falls below this channel, it could be the best time to sell of this stock. However, the best time to buy a stock as per this strategy is when it is about to break above this trading band. Such stocks offer the prospect of impressive gains.
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 Genuine Breakout 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 7585 stocks to only five.
Ready Capital Corporation (RC - Free Report) is a publicly traded mortgage real estate investment trust (REIT) which finances real estate operations. Ready Capital has a Zacks Rank #1 (Strong Buy) and its average EPS surprise over the last four quarters is 16.9%.
Gladstone Investment Corporation (GAIN - Free Report) is an investment company that seeks to make equity-type investments in small and mid-sized private businesses in the United States. Gladstone Investment’s average EPS surprise over the last four quarters is a positive 1.3%. Gladstone Investment has a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.
NeoGenomics, Inc. (NEO - Free Report) is a high-complexity CLIA-certified clinical laboratory that specializes in cancer genetics diagnostic testing. NeoGenomics has a Zacks Rank #2 (Buy) and its average EPS surprise over the last four quarters is a positive 37.5%.
Digi International Inc. (DGII - Free Report) is a leading global provider of business and mission-critical Internet of Things (IoT) products and services. Digi International has a Zacks Rank #2 and its average EPS surprise over the last four quarters is a positive of more than 100%.
Paramount Group, Inc. (PGRE - Free Report) is an REIT focused on owning, operating and managing Class A office properties. Paramount Group has a Zacks Rank #2 and its average EPS surprise over the last four quarters is a positive 1.3%.
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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