There are many strategies investors use toprofit in the
stockmarket . One of the most effective and time-tested methods is
the technical breakout strategy.
According to the breakout strategy, the investor should wait for
the stock price to break above (or below in the case of shorting) a
certain price level before entering the trade. The theory behind
this tactic is that the price momentum resulting from the original
movewill continue, creating profit opportunities for that
stock.
The opening range breakout, or ORB, became popular
with Toby Crabel's book "hedge fund manager using these
tactics.
Breakout strategies can be successfully used for any time frame.
Whether you trade on anintraday level or simply want a
long-terminvestment , the breakout strategy is always a good
starting point.
So here are the five simple steps for longer-term investors
to trade daily breakouts.
Step 1. Mark a recent high on a stock's daily
chart.
It doesn't necessarily need to be the daily high -- the breakout
line can be drawn at the simplemoving average or other technical
resistance pattern. The daily high is just one way to use the
breakout strategy. Let's use the chart for
Google (Nasdaq: GOOG)
as an example.
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Step 2. Draw a horizontal line at this high.
If you are not sure which direction a stock is going to breakout,
or are willing to short, then you can use a channel rather than a
single line. To create a channel, draw two lines on the chart, with
one at the low and the other at a high of your chosen time frame.
You can also draw this two-line channel on technical patterns
rather than the highs or lows. If the price breaks above the upper
channel line, go long. If the price breaks below the lower line,
short.
Step 3. Patiently wait for a daily bar to close above
this line -- this is the breakout.
.png)
Step 4. Buy the stock with the line now indicating the
initial stop level.
Step 5. As price moves up, move the stop level based on
your risk tolerance and goals in order to lock in profits.
However, it sometimes takes several entries at the breakout point
before the momentum is enough to carry your trade into profits.
.png)
Here are three stocks about to breakout on the upside:
1. FMC Technologies (
FTI
)
FMC provides technology solutions to the energy industry. It boasts
a $9.6 billionmarket cap andearnings are expected to grow almost
27% next year to $2.36 per share. Despite this good prospect, the
company is mired in more than $1.5 billion of debt and only $600
million incash .
The recent high of $42 is my daily breakout point. If the price
closes above $42 on a daily close, then enter long with a target at
the200-day moving average of $45.
2. Calpine Corp. (
CPN
)
Calpine is an independent wholesale power-generation company that
owns and operates natural gas and geothermal power plants in North
America. With a market cap of just above $8 billion, the company is
projected to report earnings of $1.45 per share in 2013, a 25%
increase year over year. It boasts a nearly 45% profitmargin , but
its debt-to-equity ratio is quite high at about 2.5.
This stock is very close to triggering a breakout entry
opportunity. The daily breakout level is the 200-day simple moving
average at $17.20. A daily close above this level is my breakout
entry level. The recent high of $18.80 makes a good technical
target.
3. Janus Capital Group (
JNS
)
Janus is an asset-management company with close to $2 billion in
assets and a market cap of roughly $1.5 billion. Year-over-year
revenue increased 1.5% in the third quarter to $209 million, while
earnings estimates were met at 15 cents per share. Full-year
earnings are expected to reach 56 cents and increase 9% in 2013 to
61 cents a share.
The50-day moving average creates a breakout level in this stock
with a target price of $9.50, based on the technical picture.
Risks to Consider:
Breakouts are not guaranteed profits. In fact, stocks that are
breaking out often fail to continue in the direction of the
breakout. This is why it's critical to use the entry level as the
initial stop loss. Combiningvolume and fundamental factors along
with the technical breakouts may increase the odds of their
success.
Action to Take -->
I like all three of these stocks as breakout "buy" candidates due
to the technicalprice action . Remember, always use stops and
position size properly based on your capital base, goals and risk
tolerance.