Selecting breakout stocks continue to be one of the most popular methods utilized by active investors. This technique seeks to identify those stocks whose prices are varying within a specific band. In case a stock falls below the lower bound of this band, it may be time to offload it from your portfolio. However, a stock breaking above this channel carries the promise of strong gains.
Spotting Breakout Stocks
The first step to selecting the right breakout stocks is to calculate their support and resistance levels. 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 pin down those that are on the verge of a breakout or those that have just broken above the resistance level.
Verifying 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.)
No matter whether the market is good or bad, stocks with a Zacks Rank #1 (Strong Buy) or #2 (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 more than 6,790 stocks to only 15.
Here are four of the 15 stocks that passed the screen:
Avenue Therapeutics, Inc. ATXI is a specialty pharmaceutical company. Avenue Therapeutics has a Zacks Rank #1 and its expected earnings growth for the current year is 64.2%.
Calix, Inc. CALX is a provider of cloud and software platforms, and systems and services required to deliver unified access network across the world. Calix has a Zacks Rank #1 and its expected earnings growth for the current year is more than 100%.
ChannelAdvisor Corporation ECOM is a provider of software-as-a-service solutions. ChannelAdvisor has a Zacks Rank #1 and its expected earnings growth for the current year is 62.5%.
Magic Software Enterprises Ltd. MGIC is a provider of proprietary application development, business process integration, vertical software solutions, and information technologies outsourcing software services. Magic Softwarehas a Zacks Rank #1 and its expected earnings growth for the current year is 12.1%.
You can get the rest of the stocks on this list 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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Calix, Inc (CALX) : Free Stock Analysis Report
Magic Software Enterprises Ltd. (MGIC) : Free Stock Analysis Report
ChannelAdvisor Corporation (ECOM) : Free Stock Analysis Report
Avenue Therapeutics, Inc. (ATXI) : Free Stock Analysis Report
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