Investors with an active approach often utilize a breakout investment strategy in their quest for appreciably high returns. This involves zeroing in on stocks trading within a tight band and buying them when they move out of this band. In keeping with this approach, such stocks are sold whenever they move below this narrow band. If properly implemented, such a strategy has the ability to 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 which have just breached this level.
Determining 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 7106 stocks to only 12.
Here are five of the 12 stocks that passed the screen:
Lattice Semiconductor Corporation (LSCC - Free Report) designs, develops and markets high performance programmable logic devices and related development system software. Lattice Semiconductor’s expected earnings growth for the current year is 48.5%. Lattice Semiconductor has a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.
Luna Innovations Incorporated (LUNA - Free Report) develops and manufactures fiber optic sensing, and test and measurement products. Luna Innovation has a Zacks Rank #2 (Buy) and its expected earnings growth for the current year is 100%.
the Rubicon Project, Inc. (RUBI - Free Report) is a global technology company that focuses on the automation of the buying and selling of advertising. the Rubicon Project has a Zacks Rank #2 and its expected earnings growth for the current year is 61.8%.
AngloGold Ashanti Limited (AU - Free Report) is an independent, global gold mining company. AngloGold Ashanti has a Zacks Rank #2 and its expected earnings growth for the current year is more than 100%.
B2Gold Corp. (BTG - Free Report) is a gold producer with five operational mines (one each in Mali, Namibia, the Philippines, and two in Nicaragua). B2Gold has a Zacks Rank #2 and its expected earnings growth for the current year is 7%.
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.