As popular as it is divisive, a breakout strategy is one of the most frequently used techniques among active investors. The idea is fairly simple - to identify stocks trading within a narrow band and buy them when they move above this channel or sell when they move below. If a stock moves above the channel, it promises substantial gains for investors.
But critics warn against the risk of timing such a move incorrectly or identifying the wrong breakout level. However, when executed correctly, this strategy can yield lucrative gains, which explains its enduring popularity.
Picking Prospective Candidates
In order to identify breakout stocks, you must first determine their resistance and support levels. A resistance level is the barrier which must be broken so as to be identified as a breakout stock. Meanwhile, a support level is the floor for the stock's movement.
At the breakout level, the demand for the stock has peaked, making it a natural choice for traders. On the other hand, when a stock hits the support floor, traders are eager to offload it. In order to spot breakout stocks, you would have to see which of these are on the brink of breaking the resistance barrier or those that have just breached this 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 genuine 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 7066 stocks to only 15.
Here are the top five stocks that meet these criteria:
SSR Mining Inc. SSRM is a mining company. It focused on the operation, development, exploration and acquisition of precious metal projects. SSR Mining has a Zacks Rank #1 (Strong Buy) and its expected earnings growth for the current year is 87%.
Qiwi plc QIWI operates as a provider of next-generation payment services primarily in Russia and the CIS. Qiwi's expected earnings growth for the current year is 53.1%. Qiwi has a Zacks Rank #1. You can see the complete list of today's Zacks #1 Rank stocks here .
Harmony Gold HMY is based in Randfontein, South Africa. The company conducts underground and surface gold mining. It is also engaged in related activities such as exploration, processing, smelting and refining. Harmony Gold has a Zacks Rank #2 (Buy) and its expected earnings growth for the current year is 100%.
Kinross Gold Corp KGC is primarily involved in the exploration and operation of gold mines. Kinross Gold has a Zacks Rank #2 and its expected earnings growth for the current year is 30%.
Digital Turbine, Inc. APPS offers products and solutions for mobile operators, device OEMs and third parties. Digital Turbine has a Zacks Rank #2 and its expected earnings growth for the current year is 62.5%.
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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 .
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 Digital Turbine, Inc. (APPS): Free Stock Analysis Report Kinross Gold Corporation (KGC): Free Stock Analysis Report Harmony Gold Mining Company Limited (HMY): Free Stock Analysis Report QIWI PLC (QIWI): Free Stock Analysis Report Silver Standard Resources Inc. (SSRM): Free Stock Analysis Report To read this article on Zacks.com click here. Zacks Investment Research