5 Breakout Stocks to Buy Now

The technical setups in these five stocks are showing solid upside potential right now.
By Jonas Elmerraji ,

The big U.S. market indices each gave back about 1% yesterday, starting the week on a somewhat sour note. The selling was pretty uniform too. Of the 500 stocks in the S&P 500, 432 ended lower than they started. That's 86% of the index.

But there's another story that investors should be paying attention to during a one-sided trading session like yesterday's: the other 68 stocks in the index that actually managed to end the day higher.

In a big way, 2015 has been a year of leaders and laggards. While the big stock market averages have spent most of the year grinding their way sideways around breakeven, zooming in to the individual names has presented a handful of notable outperformers and underperformers. By focusing on the names that are actually working in this market, it's been possible to generate some pretty impressive outperformance in 2015.

To find the stocks likely be the leaders in the final stretch of 2015, we're turning to the charts for a technical look at five setups that look ready to deliver breakout gains.

In case you're unfamiliar with technical analysis, here's the executive summary: Technical analysis is a way for investors to quantify qualitative factors, such as investor psychology, based on a stock's price action and trends. Once the domain of cloistered trading teams on Wall Street, technicals can help top traders make consistently profitable trades and can aid fundamental investors in better planning their stock execution.

Without further ado, here's a rundown of five technical setups that are showing solid upside potential right now.

General Mills

Up first on the list is $33 billion consumer foods manufacturer General Mills (GIS) - Get Report . General Mills has actually been a reasonably strong performer year-to-date. This stock has generated total returns of 9% and change since the calendar flipped to January.

But don't worry if you've missed the move so far. Shares look likely to kick off a second leg higher this fall. Here's how to trade it.

General Mills is currently forming an ascending triangle pattern, a bullish price setup that's formed by horizontal resistance up above shares (at $59 in this case), and uptrending support to the downside. Basically, as General Mills bounces in between those two technically meaningful price levels, shares have been getting squeezed closer and closer to a breakout through our $59 price ceiling. When that s happens, we've got our buy signal.

Relative strength, (not to be confused with RSI at the top of the chart) adds some extra confidence to the upside in General Mills right now. That's because this stock's relative strength line is holding its uptrend from the end of last year, indicating that shares are continuing to beat the rest of the market long-term.

Keep a close eye on this one. If $59 gets taken out, it's time to be a buyer.

Amerco

We're seeing the exact same price setup in $8 billion moving and storage operator Amerco (UHAL) - Get Report , the parent company of U-Haul International. Like General Mills, Amerco is currently forming an ascending triangle setup after outperforming all year long. For this stock, the breakout level to watch is resistance up at $410.

Why all of that significance at the $410 level? It all comes down to buyers and sellers. Price patterns, such as this ascending triangle setup in Amerco, are a good quick way to identify what's going on in the price action, but they're not the actual reason a stock is tradable. Instead, the "why" comes down to basic supply and demand for Amerco's stock.

The $410 resistance level is a price where there has been an excess of supply of shares; in other words, it's a spot where sellers have previously been more eager to step in and take gains than buyers have been to buy. That's what makes a breakout above $410 so significant -- the move means that buyers are finally strong enough to absorb all of the excess supply above that price level.

Like any trade, risk management is key here. After $410 gets taken out, the 50-day moving average becomes a logical place to park a protective stop.

Lions Gate Entertainment

It doesn't take an expert technical trader to figure out what's happening in shares of Lions Gate Entertainment (LGF)  right now. All year long, this TV and movie producer has been moving up and to the right, bouncing its way higher in a well-defined uptrending channel. And this fall, Lions Gate still looks like a "buy-the-dips stock."

The price channel in Lions Gate is formed by a pair of parallel trend lines that have identified the high-probability range for shares of this stock to remain stuck within. Put another way, every test of the bottom of that channel has provided a very attractive buying opportunity from a risk/reward standpoint. While the rest of the market was rallying hard in October, Lions Gate spent most of the month correcting back to trend line support. The next bounce higher off of that blue line is our buy signal.

Actually waiting for that bounce is important for two key reasons: It's the spot where shares have the most room to move up before they hit resistance, and it's the spot where the risk is the least (because shares have the least room to move lower before the channel breaks, and you know you're wrong).

Remember, all trend lines do eventually break, but by actually waiting for a bounce to happen first, you're ensuring Lions Gate can actually still catch a bid along that line before you put your money on shares.

Bed Bath & Beyond

Home furnishings chain Bed Bath & Beyond (BBBY) - Get Report  is a good example of what happens when a trend line does break. Year-to-date, this $10 billion retailer has been an awful bet, shedding about 21% of its market value since January. But shares finally broke out through the top of their price channel in November, signaling a potentially major change in trend this fall.

Since breaking out at the beginning of last week, Bed Bath & Beyond has been consolidating sideways in a relatively tight range. That's not uncommon after a big move, and this stock's decline and subsequent trend line break certainly qualifies as that. From here, a good low-risk buying opportunity comes on a push through near-term resistance at $62.

Momentum, measured by 14-day RSI, provides some extra evidence for the reversal. Our momentum gauge has been in an uptrend since August, making higher lows that confirm the bullish action in Bed Bath & Beyond's price. If you decide to be a buyer here, be sure to keep a tight stop in place.

For another take on Bed Bath & Beyond, which showed up on a recent list of Goldman's 7 Stocks With the Highest Shareholder Returns, check out "Buy Bed Bath & Beyond Right Now."

Amgen

Last up on our list of breakout movers is Amgen (AMGN) - Get Report . Amgen has spent the last several months showing traders a classic reversal setup called an inverse head and shoulders. The pattern signals exhaustion among sellers, and it's identified by two swing lows that bottom out around the same level (the shoulders), separated by a bigger trough called the head; the buy signal comes on the breakout above the pattern's "neckline." That breakout happened in late October, when Amgen pushed its way through $155.

But don't worry if you missed the move in Amgen. A throwback is giving traders a second chance at a low-risk entry here.

A throwback happens when a stock moves back down to test newfound support at its former breakout level -- in this case at $155. And while throwbacks look ominous, they’re actually constructive for stock prices because they reverify the stock’s ability to catch a bid at support. That makes the next bounce off of $155 a high-probability buy signal.

It's important to be reactionary and actually wait for a bounce here. At this point, we still don't know whether shares are simply bleeding off some overbought momentum from the big up-move in October, or whether sentiment has shifted towards the sellers for some reason. A bounce at $155 indicates that there's still a glut of demand at and below that price level. Otherwise, if shares violate our newfound support line at $155, then the pattern is broken and you don't want to own Amgen anymore anyway.

For more on Amgen, check out "Buy Amgen's Healthy Dividend, Hold for Its Growth Prescription."

Disclosure: This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.

Loading ...