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5 Stocks Setting Up to Break Out

GameStop

One stock that's quickly approaching a major breakout is GameStop (GME - Get Report), a multichannel retailer of video game products and personal computer entertainment software. This stock hasn't done much so far in 2011, with shares off by around 4%.

The company reported a weak second quarter on Thursday, announcing that earnings fell 15.4% to 22 cents per share vs. 26 cents per share in the prior-year quarter. But GameStop told a good story about the future, saying that the holiday season should be strong due to hot games such as Call of Duty and Modern Warfare 3.

If you take a look at the chart for GameStop, you'll see that this stock has started to break out above a key descending trend line that started back in late June. This trend line has marked a big resistance level on the stock for the past two months, so now that the stock has started to trade above it, it could mean a major trend change is at hand.

Another major positive here for GameStop is that upside volume has started to pick up dramatically as the stock has run from $18.30 a share to its current price of just under $22. Volume yesterday was 14 million, and volume today has already clocked in at 5.2 million, which is well above its three-month average of 4.2 million.

One could be a buyer of this stock once it clears its 200-day moving average of $22.93 a share on solid volume. I would add to any long positions after it then trades above its 50-day moving average of $24.25 a share. I would use a mental stop just below $21 in case this stock isn't ready to start a new bullish trend change.

Keep in mind that this is a heavily shorted stock that could easily get squeezed dramatically higher from here if the bulls gain full control. The current short interest as a percentage of the float for GameStop is massive 25.1%. In fact, I included the stock this week on a list of earnings short-squeeze plays.

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