Picking breakout stocks is one of the most favored methods for people utilizing an active investing approach as this strategy offers scope for superlative returns. This method involves zeroing in on stocks whose prices vary within a narrow band.
If the price of the stock falls below this channel, it could be the best time to sell it off. 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 have the potential to record impressive gains.
Zeroing in on Breakout Stocks
In order to select the right breakout stock one has to first 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 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 portfolio. 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.
Has a Breakout Really 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.)
No matter whether the market is good or bad, stocks with a Zacks Rank #1 (Strong Buy) have a proven history of outperformance. You can see the complete list of today’s Zacks #1 Rank stocks here.
• 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 6,785 stocks to only four.
Here are three of the four stocks that passed the screen:
AdaptHealth Corp. AHCO is a provider of home medical equipment (HME). AdaptHealth has a Zacks Rank #2. Its expected earnings growth for the current year is 98.9%.
FGL Holdings FG is a seller of individual life insurance products and annuities. The company carries a Zacks Rank #1. Its expected earnings growth for the current year is 8.5%.
Kinross Gold Corporation KGC is engaged in the acquisition, exploration and development of gold properties. Its expected earnings growth for the current year is 37.4%. Kinross Gold carries a Zacks Rank #2.
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.
The Research Wizard is a great place to begin. It's easy to use. Everything is in plain language. And it's very intuitive. Start your Research Wizard trial today. And the next time you read an economic report, open up the Research Wizard, plug your finds in, and see what gems come out.
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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.