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4 Stocks Setting Up to Break Out

WINDERMERE, Florida ( Stockpickr) -- If you're a bull who likes to trade breakouts in the stock market, then you're probably very happy with the action last week in the S&P 500, which managed to break out above its previous overhead resistance level at 1130.

The 1130 area had marked a major resistance level in the markets since late June, so the move is considered very significant among the technical trading community. Some traders are chalking it up to end-of-the-quarter window dressing by institutional money managers, but at the end of the day, price is what pays the bills for traders. So no matter what the reason is for the current uptrend, you have to give it the benefit of the doubt.

Bulls are now hoping that the S&P can trade above the next key resistance level at 1150 to 1160. A move above those levels will set up the S&P for a test of 1170 and then 1200. Reaching these upside targets will not be an easy task for the bulls. Some problems with the market include lack of participation from the financial stocks, a narrow group of leadership stocks and very low trading volumes. The lower trading volumes could simply be due to less retail trader participation and large outflows from equity funds into bond funds.

Lower volumes could also mean that most of the recent run was simply short-covering rallies and not real institutional demand. As of Sept. 15, short interest on the NYSE stood at 14.4 billion shares, which is near the highest level that the market has seen in over a year. That 14.4 billon in shorts is also unchanged from the last reading in August. If these shorts don't manage to push prices down, and soon, then this current uptrend will continue on its path of least resistance, which is higher.

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A continued move higher will lead to new potential breakouts, especially if the S&P can manage to trade above its yearly highs at 1220. Trading breakouts is not a new game on Wall Street. This strategy has been pioneered by legendary traders such as William O'Neal, Stan Weinstein, Nicolas Darvas and many others.

A breakout occurs when a stock makes a move through a significant level of support or resistance, which is usually followed by heavy volume and increased volatility. Wall Street players love to see an upside breakout because it demonstrates strength in the underlying asset as the price breaks above a level of previous resistance. An upside breakout can also take a stock to new highs, which will generate a lot of interest as the stock shows up on sophisticated software that scans for this type of action.

Here 's a look at a number of stocks that are already breaking out, or could be setting up to become solid breakout stock plays.
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