Picking breakout stocks is one of the most favored methods for those utilizing an active investing approach since this strategy promises superlative returns. This method involved zeroing in on those stocks whose prices are varying within a narrow band. If the price of the stock falls below this channel, it could be the best time to sell off this stock.
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 offer the prospect of impressive gains.
Identifying Breakout Levels
The key to this strategy is calculating the support and resistance levels of a stock. The floor of a 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 a stock's breakout level and it can gain substantially if it 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 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.
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.
• 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 7887 stocks to only 19.
Here are the top five stocks that meet these criteria:
TiVo Corporation TIVO is a provider of entertainment technology and audience insights on a global basis. TiVo has a Zacks Rank #1 (Strong Buy) and its average EPS surprise over the last four quarters is 67.6%.
IAMGOLD Corporation IAG is an international gold exploration and mining company based in Canada. The stock has a Zacks Rank #1 and its average EPS surprise over the last four quarters 141.7%. You can see the complete list of today's Zacks #1 Rank stocks here .)
Guess?, Inc. GES designs, markets, distributes and licenses casual apparel and accessories for men, women and children. Guess? has a Zacks Rank #2 (Buy) and its average EPS surprise over the last four quarters is 33%.
SeaChange International, Inc. SEAC develops, markets and supports products to manage, store and distribute digital video for television operators, broadcast and telecommunications companies. SeaChange International has a Zacks Rank #2 and its average EPS surprise over the last four quarters is 26.4%.
P.A.M. Transportation Services, Inc. PTSI is an irregular route, common and contract motor carrier authorized to transport general commodities. P.A.M. Transportation Services has a Zacks Rank #2 and its average EPS surprise over the last four quarters is 15.3%.
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 .
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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 P.A.M. Transportation Services, Inc. (PTSI): Free Stock Analysis Report SeaChange International, Inc. (SEAC): Free Stock Analysis Report TiVo Corporation (TIVO): Free Stock Analysis Report Iamgold Corporation (IAG): Free Stock Analysis Report Guess?, Inc. (GES): Free Stock Analysis Report To read this article on Zacks.com click here.