Picking breakout stocks, or in other words, searching for stocks whose prices are fluctuating within a specific band, is an active investing approach. It’s prudent to offload the stock if it falls below the lower bound of this band. Similarly, once the stock breaks above this channel, it has all the chance of delivering strong gains.
Zeroing in on Breakout Stocks
In order to select the right breakout stock, one has to first 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 at which it trades over a considerable period.
In other words, the demand for a stock is at its lowest at its support level, which means that most traders are willing to sell it. At the resistance level, most traders are willing to go long on the stock, meaning they would like to add them to their portfolio. 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 Breakout Really 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 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 that may not seem attractive at first glance.
• Percentage price change over four weeks between 10% and 20% (Stocks showing considerable price increases, but whose gains are not excessive.)
• Current Price /52-Week High greater than or equal to 0.9 (Stocks 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.)
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 that move by a greater degree than the broader market but within a reasonable limit.)
• Current price less than or equal to $20 (Stocks that are reasonably priced.)
These criteria narrow down the universe of more than 7,706 stocks to only eight.
Here are four of the eight stocks that passed the screen:
CymaBay Therapeutics CBAY is a biopharmaceutical company. CymaBay Therapeutics currently carries a Zacks Rank #2. CBAY has an expected earnings growth rate of 24.8% for the current year.
RxSight RXST is a commercial-stage medical technology company focusing on patients following cataract surgery. RxSight currently carries a Zacks Rank #2. RXST has an expected earnings growth rate of 18.3% for the current year.
UWM UWMC is a parent of United Wholesale Mortgage. It underwrites and provides closing documentation for residential mortgage loans. UWM currently carries a Zacks Rank #1. UWMC has an expected earnings growth rate of 55.6% for next year.
Remitly Global RELY is a mobile-first provider of remittances and financial services for immigrants. Remitly Global currently carries a Zacks Rank #2. RELY has an expected earnings growth rate of 5.9% for the current year.
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 test 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