Tech is back in the spotlight thanks to a surge in the Nasdaq Composite on Monday. This is a development that all traders should cheer. History teaches us that when tech is leading, profits seem to flow easier. In the aftermath of the rally, we’ve seen several stocks clear resistance and signal more upside is imminent. Today, I’m calling out three of my top breakout stocks to buy.
For the uninitiated, a breakout occurs when prices finally push through a resistance zone. It reflects a shift in the balance of power from bears to bulls and usually marks a smart buy point for spectators. As new buyers emerge and short-sellers run for cover, it elevates the odds for upside follow through.
There are no guarantees, of course, and that is why stop losses are critical. In addition to outlining the pattern, I’ll share where to bail if the setups sour.
Here are three breakout stocks I am watching now:
Breakout Stocks: Spotify (SPOT)
Spotify had a rough September, but the tides have finally turned. Over the past month, SPOT stock clawed its way back from the lows by carving out a nice little uptrend. Tuesday’s 6.7% ramp thrust price back above the 50-day moving average and short-term resistance at $255.
With the stock now on the north side of all its moving averages, it has a clear path to $300. Consider that your upside target. The volume surge during yesterday’s run increases the likelihood that the breakout sticks. If you’re willing to bet on it, then Wednesday’s 3.5% pullback creates a compelling entry point.
Since the quarterly report is just around the corner, I suggest building a cheap enough trade that you’re comfortable holding into the event.
The Trade: Buy the Nov $290/$300 bull call spread for $1.90.
The max loss is $1.90, and the max gain is $8.10.
DocuSign took a much-needed rest for the past three months by consolidating in a range. The quick pop-and-drop movement after earnings threw a wrench into the basing pattern. However, I am treating that as an outlier due to how quickly it disappeared. While prices paused, resistance cropped up at $230.
Tuesday saw us finally broke above it, and that clears the deck for a push back to $290. While I think it will take a while to retest the peak, even running to $260 will generate a nice gain for those who played the breakout. At 30%, the implied volatility percentile is high enough to make both bull puts and bull calls interesting.
Ultimately, it comes down to your desired probability of profit. I’m sticking with my theme of bull calls.
The Trade: Buy the Dec $250/$260 bull call spread for $3.40.
The max loss is $3.40, and the max gain is $5.60.
Breakout Stocks: Baidu (BIDU)
The final candidate for today’s breakout stocks to buy is Baidu. The Chinese internet giant was screaming higher Wednesday, closing up by more than 7%.
With the run-up, BIDU is clearing two resistance pivots at $130 and $134. Its next stop is the 52-week high near $145. If you think it can get there, then, once again, bull call spreads are an attractive strategy. I’m going to use out-of-the-money options to cheapen the trade cost. We’ll also use December contracts to give ourselves two months for Baidu to make the necessary move.
The Trade: Buy the Dec $150/$155 bull call spread for $1.15.
The max loss is $1.15, and the max gain is $3.85.
On the date of publication, Tyler Craig did not have (either directly or indirectly) any positions in the securities mentioned in this article.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.