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TheStreet Open House

4 Stock Setting Up to Break Out

By Roberto Pedone

WINDERMERE, Florida ( Stockpickr) -- Stock traders are starting to get frustrated with the action in the markets. For the past 11 trading sessions, the S&P 500 has been stuck in a trading range between 1150 on the upside and 1130 on the downside. While this action might be frustrating for many, it can also be viewed as a healthy consolidation before the next leg higher.

Of course, the bears would tell you this action is toppy and stocks are being distributed before the rug is pulled out from underneath the market bulls. That could very well be at play here, which is way it's always important to let the price action in the market provide you with clues to the next move.

Now, if the S&P can manage to breakout above 1150 on strong volume, then stocks should setup to soar towards the yearly highs at around 1220. However, if we break below 1130 and volume starts to expand dramatically, then stocks are probably going back towards 1040, if not even lower. I think the market is going to make a massive move, no matter which way it decides to break, due to the energy that has been built up in the markets in the past couple of months as seen by the wild swings in stock prices. Also, investor sentiment has been swinging wildly from bullish to bearish and vice versa.

Also: 3 Technical Setups to Watch

This is usually a recipe for a giant move because it means that market players have a lot of conviction about their direction trades on both sides. Think of it as a battle field where the longs and shorts are bunkering down and preparing for war. At some point, one group is going to get trapped and caught on the wrong side. This will be where the big energy comes from to produce a gigantic move.

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 and Nicolas Darvas. 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.

Also: Charts of the Week: Coinstar, Denny's, China Nepstar

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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