Choosing breakout stocks is probably one of the most popular techniques used by active investors. The logic behind this strategy for stock selection is to identify stocks that are trading within a narrow band. Such stocks are to be purchased as soon as they move above this channel and sold when they fall below. In case a stock moves above this band, it usually gains momentum.
However, market watchers often caution against timing such a move incorrectly. This is because there is a significant risk of identifying stock movements as breakouts, even when this is not the case. At the same time, when utilized correctly, this strategy yields substantive gains, which is the reason for its enduring popularity.
Determining Breakout Levels
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.
Has a Genuine Breakout 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.
Screening Parameters
•
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 7,484 stocks to only 10.
Here are four of the 10 stocks that passed the screen, each carrying a Zacks Rank #2:
Velocity Financial, Inc.
VEL
is the owner and operator of a real estate finance company. The company’s expected earnings growth rate for the current year is more than 100%.
Harvard Bioscience, Inc.
HBIO
is a developer, manufacturer and seller of technologies, products, and services used in the fundamental research, discovery, and pre-clinical testing for drug development. The company’s expected earnings growth rate for the current year is 75%.
Duluth Holdings Inc.
DLTH
provides casual wear, workwear and accessories for men and women. It has an expected earnings growth rate of 69.1% for the current year.
Genco Shipping & Trading Limited
GNK
is engaged in ocean transportation of dry bulk cargoes across the globe. The company’s expected earnings growth rate for the current year is more than 100%.
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.
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.
Click here to sign up for a free trial to the Research Wizard today
.
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
.
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days.
Click to get this free report