Selecting breakout stocks is probably one of the most favored techniques among active investors. The idea behind this kind of stock selection is to determine which stocks are trading within a narrow channel. These stocks are to be bought as soon as they move above this band and sold when they fall below. In case a stock moves above this band, it usually gains momentum.
Identifying Breakout Levels
The key to this strategy is calculating the support and resistance levels of a stock. The floor 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 resistance 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 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 7395 stocks to only 15.
Here are the top five stocks that meet these criteria:
Great Lakes Dredge & Dock Corporation (GLDD - Free Report) is a provider of dredging services in the United States. Great Lakes Dredge & Dock’s average EPS surprise over the last four quarters is more than 100%. Great Lakes Dredge & Dock has a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Oxford Immunotec Global PLC (OXFD - Free Report) is a medical diagnostics company. Oxford Immunotec has a Zacks Rank #2 (Buy) and its average EPS surprise over the last four quarters is more than 100%.
DSP Group, Inc. (DSPG - Free Report) is a fabless semiconductor company, offering advanced chip-set solutions for a variety of applications. DSP Group has a Zacks Rank #2 and its average EPS surprise over the last four quarters is more than 100%.
Telenav, Inc. (TNAV - Free Report) is a provider of location based services, or LBS, including voice guided navigation, on mobile phones. Telenav has a Zacks Rank #2 and its average EPS surprise over the last four quarters is 23.7%.
Osisko Gold Royalties Ltd (OR - Free Report) is a mining company which is engaged in exploration and mining for gold and other precious metals. Osisko Gold Royalties has a Zacks Rank #2 and its average EPS surprise over the last four quarters 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.