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Stocks Under $10 with 50-100% upside potential - 14 days FREE!

5 Big Stocks to Trade for Gains

Eli Lilly

Another pharmaceutical stock that's showing breakout potential right now is Eli Lilly (LLY). Lilly broke out on Tuesday, pushing through previous resistance at $38.50, and the breakout was confirmed by yesterday's open above that level - even if much of yesterday's gains got given away by the close. So should you buy this breakout?

One major benefit to this setup in Lilly is the fact that $38.50 resistance is very well defined -- it's a level that's acted as a price ceiling the last three times shares have tested it, so the fact that shares held above that price yesterday indicates that the supply/demand equation for shares has shifted dramatically in favor of longs. Still, Lilly has moved enough off of that resistance level to warrant waiting.

Once broken, resistance levels act as support levels for shares. And it's not uncommon to see a stock break out only to retest newfound support as it consolidates; it's called a throwback. Throwbacks are good because they validate the strength of a price level we're watching, and provide traders with a second low-risk entry for shares. I'd be looking for Lilly to throwback to support -- otherwise, if shares make their way higher than yesterday's close, the upward trajectory looks likely to continue from here.

Either way, I'd recommend keeping a protective stop at the 50-day moving average.

Eli Lilly is one of Merrill Lynch's 10 Favorite Stocks for 2012.

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