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5 Stocks Setting Up to Break Out

WINDERMERE, Fla. ( Stockpickr) -- U.S. stocks are up modestly midday off of strong earnings reports from Google (GOOG) and Citigroup (C) and a fresh round of M&A activity that involved BHP Billiton (BHP) acquiring Petrohawk (HK) and Carl Icahn eyeing a $10.2 billion bid for Clorox (CLX).

If it weren't for a downgrade warning last night from Standard & Poor's, which said that there's a 50% chance that it may lower its U.S. debt rating, and the fact that eight European banks failed their stress tests, then stocks would most likely be even higher today. Keep in mind that overall the European bank stress tests are being viewed as a success, but many traders are still questioning the results since 16 banks barely survived the tests.

As a dedicated trend trader, I like to see the market moving higher in the face of bad news, even if it's modestly higher. A strong case could be made that just the potential of a U.S. credit downgrade is such dire news that it trumps anything bullish that's crossing the wires at this moment. Market players should pay close attention to the news flow in the coming days and weeks. If that news is predominately negative, and the market still trends higher, then consider that very bullish action.

Most of the major U.S. indices are trading just above their 50-day moving averages or right on that key technical level. The S&P 500 for example, which is one of the most followed indices by large Wall Street traders, is actually trading right under its 50-day moving average of 1312.94. If the S&P 500 can't get back above this key level, then stocks could easily see another notable selloff.

On the flipside, if stocks find support on all of the indices at their 50-day moving averages, then stocks could start another uptrend that could eventually lead to a challenge of their 52-week highs. Market players need to be watching this key technical area on all three indexes very closely in the coming days and weeks.

As of midday, the Dow Jones Industrial Average is up around 17 points at 12,455.05 and the S&P 500 is up over 4 points at 1313.28. The tech-heavy Nasdaq has added 18 points to 2781.49.

Related: 5 Heavily Shorted Market Leaders Set to Soar

The best traders in the world understand that markets are made up of thousands of stocks and tons of sectors. With so many moving parts, there's always some sector or stock that's breaking out and moving higher. Often times those moves will not be dependent on what the overall market is doing.

Trading breakouts is not a new game on Wall Street. This strategy has been by legendary traders such as William O'Neal, Stan Weinstein and Nicolas Darvas.

Here's a look at a number of stocks that look poised to break out and potential trade higher from current levels.
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Chart of I:DJI
DOW 17,755.67 -42.82 -0.24%
S&P 500 2,084.84 -5.27 -0.25%
NASDAQ 5,104.2770 -23.2480 -0.45%

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