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5 Stocks Setting Up to Break Out

Stocks in this article: GMEQIHUZAGGAUQLLNWMOTR

Limelight Networks

One more stock worth eyeing for a breakout trade is Limelight Networks (LLNW), a provider of content delivery network services. If you're looking for a depressed stock that has the chance to bounce big, check out this one, which is by over 60% so far in 2011.

If you caught my breakout article last week, then you will notice that Limelight's chart is very similar to Motrocity's (MOTR). Shares of Motricity exploded higher on Monday by over 25% after that stock broke out of a similar pattern.

If you take a look at the chart for Limelight Networks, you'll see that this stock has been stuck in a nasty downtrend from the past six months falling from a high of $7.39 a share in late April to its current price of just under $2.30 a share. During that entire slide, the stock never once gave you a reason to buy it since it was clearly making higher lows and lower lows. This demonstrates that the trend was down and traders were selling rallies and pullbacks aggressively. The stock was also failing at its 50-day and 200-day moving averages on a regular basis. This was also a sign it was being distributed by large traders.

That was then though and this is now, and stocks don't fall forever unless the company is going bankrupt. What we can see now is that shares of LLNW have found some buying support at around $1.95 to $2.04 a share on big volume. A number of recent up days have seen volume come in well above its three-month average action of 2.1 million shares.

This big volume is following a major gap down on the stock from a few weeks ago where shares fell from over $3.50 a share to its recent low of $1.95 a share. That recent gap down could be signaling a short-term bottom for the stock since shares have started to stabilize and heavy upside volume is moving in.

One could be a buyer of this stock above $2.45 to $2.50 and stop out if it trades a few percentage points below that level. A move above those levels will mean the stock is breaking out above its gap down day high price. When this happens, a stock can bounce huge and fill some of that gap as short-sellers lock in profits and buy the stock back for the bounce. Be prepared for Motrictiy-type move if you see LLNW break above those levels with volume.

To see more breakout candidates, including Royal Gold (RGLD), Mentor Graphics (MENT) and CF Industries (CF), check out the Breakout Stocks of the Week portfolio on Stockpickr.

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At the time of publication, author had no positions in stocks mentioned.

Roberto Pedone, based out of Windermere, Fla., is an independent trader who focuses on stocks, options, futures, commodities and currencies. He is also an outside contributor to Beconequity.com and maintains the website Maddmoney.net, which he sold to Blue Wave Advisors in 2008. Roberto studied International Business at The Milwaukee School of Engineering, and he spent a year overseas studying business in Lubeck, Germany.
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