For active investors, seeking breakout stocks is often a preferred investment strategy. In order to do so, they must zero in on stocks trading within a fairly tight range and purchase them when they move out of this band and offload them whenever they fall below the band. If correctly implemented, such a strategy could deliver impressive returns.
Determining Breakout Levels
The key to this strategy is calculating the support and resistance levels of a stock. The floor of the 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 its breakout level and it is poised to gain substantially if 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 that this is 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.
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 7661 stocks to only 11.
Here are the top 5 stocks that meet these criteria:
Clarus Corporation CLAR engages in the design, manufacture and marketing of outdoor equipment and apparel for climbing, mountaineering, backpacking, skiing and other outdoor recreation activities. Clarus Corp has a Zacks Rank #1 (Strong Buy) and its average EPS surprise over the last four quarters is more than 100%.
SecureWorks Corp. SCWX offers intelligence-driven information security solutions focused on protecting from cyber-attacks. SecureWorks has a Zacks Rank #1 and its average EPS surprise over the last four quarters is 63.3%.
Banco Bradesco S.A. BBD offers banking products and services to individuals and businesses. Banco Bradesco’s average EPS surprise over the last four quarters is 16.4%. Banco Bradesco has a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.
El Pollo Loco Holdings, Inc. LOCO through its subsidiary, develops, franchises, licenses and operates quick-service restaurants under the name El Pollo Loco. El Pollo Loco has a Zacks Rank #2 (Buy) and its average EPS surprise over the last four quarters is 5.5%.
OFG Bancorp OFG is a financial holding company that conducts its business activities through its subsidiaries, primarily in Puerto Rico. OFG Bancorp has a Zacks Rank #2 and its average EPS surprise over the last four quarters is 27.1%.
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.
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