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 stocks that 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.
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 movements while a resistance level refers to the maximum price which it trades within over a considerable period.
In other words, the 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.
Identifying Whether It’s for Real
Stocks which have breached their resistance level should ideally be in high demand among traders. But the test of whether this is a genuine breakout is whether they go on to attain higher prices and the old barrier becomes a new support. This is why it is important to determine whether a long-term price trend is about to emerge.
Only a study of long-term trends can determine whether the existing trading channel has been breached effectively. This indicates the strength of the support or resistance levels. If you can identify the effective channel for a stock, picking it even at a not-so-reasonable price would give you significant returns.
• 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 6986 stocks to only 6.
Here are the top 5 stocks that meet these criteria:
Avon Products, Inc. (AVP - Free Report) manufactures and markets beauty and related products. Avon Products has a Zacks Rank #1 (Strong Buy) and its expected earnings growth for the current year is more than 100%.
Hallmark Financial Services, Inc. (HALL - Free Report) and its wholly owned subsidiaries engage in the sale of property and casualty insurance products. Hallmark Financial’s expected earnings growth for the current year is 33.7%. Hallmark Financial has a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.
DHI Group, Inc. (DHX - Free Report) offers specialized websites focused on select professional communities. DHI Group has a Zacks Rank #2 (Buy) and its expected earnings growth for the current year is 82.1%.
Anglo American plc (NGLOY - Free Report) is a mining company. Its portfolio includes iron ore, manganese, metallurgical coal, copper, nickel, platinum and diamonds. Anglo American has a Zacks Rank #2 and its expected earnings growth for the current year is 9.6%.
Toray Industries, Inc. (TRYIY - Free Report) is a manufacturer, processor and seller of textiles, fibers, performance chemicals and composites. Toray Industries has a Zacks Rank #2 and its expected earnings growth for the current year is 19.1%.
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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.