WINDERMERE, Florida (Stockpickr) -- If you're a bull who likes to trade breakouts in the stock market, then you're probably very happy with the action last week in the S&P 500, which managed to break out above its previous overhead resistance level at 1130.
The 1130 area had marked a major resistance level in the markets since late June, so the move is considered very significant among the technical trading community. Some traders are chalking it up to end-of-the-quarter
by institutional money managers, but at the end of the day, price is what pays the bills for traders. So no matter what the reason is for the current uptrend, you have to give it the benefit of the doubt.
Bulls are now hoping that the S&P can trade above the next key resistance level at 1150 to 1160. A move above those levels will set up the S&P for a test of 1170 and then 1200. Reaching these upside targets will not be an easy task for the bulls. Some problems with the market include lack of participation from the financial stocks, a narrow group of leadership stocks and very low trading volumes. The lower trading volumes could simply be due to less retail trader participation and large outflows from equity funds into bond funds.
Lower volumes could also mean that most of the recent run was simply
and not real institutional demand. As of Sept. 15, short interest on the
stood at 14.4 billion shares, which is near the highest level that the market has seen in over a year. That 14.4 billon in shorts is also unchanged from the last reading in August. If these shorts don't manage to push prices down, and soon, then this current uptrend will continue on its path of least resistance, which is higher.
A continued move higher will lead to new potential breakouts, especially if the S&P can manage to trade above its yearly highs at 1220. Trading breakouts is not a new game on Wall Street. This strategy has been pioneered by legendary traders such as William O'Neal, Stan Weinstein, Nicolas Darvas and many others.
A breakout occurs when a stock makes a move through a significant level of support or resistance, which is usually followed by heavy volume and increased volatility. Wall Street players love to see an upside breakout because it demonstrates strength in the underlying asset as the price breaks above a level of previous resistance. An upside breakout can also take a stock to new highs, which will generate a lot of interest as the stock shows up on sophisticated software that scans for this type of action.
Here 's a look at a number of stocks that are already breaking out, or could be setting up to become solid
First up on the breakout watch list is
, a provider of entertainment and communications services in the UK.
Shares of Virgin Media have started to break out above some previous overhead resistance at $22.41 a share. What I really like about this breakout is that it's coming on some decent volume. If you take a look at the chart, you can see that up-day volume has been much heavier than down-day volume during September. This is bullish price action when you consider how much we've heard about the overall low volume action in the broader markets.
Another bullish development on the chart for Virgin is that it shows a pattern of higher lows and higher highs since the sock found some support at $14.50 a share. This demonstrates that investors are eager to snap up the stock on any pullback.
If shares of Virgin can hold this breakout level, it could mean the stock is setting up to test the next area of significant resistance at around $25 a share. Any move above $30 would be very bullish since it would push the stock into all-time-high territory. It might be worth putting this stock on your trading radar.
Next up on the list is potential breakout play
, a leading provider of advanced process control metrology systems used primarily in the fabrication of semiconductors, high-brightness LEDs, data storage devices and solar photovoltaics.
This stock has been trading in a channel since a major gap up in August between the prices of $12 and $14.90 a share. Now Nanometrics looks poised to breakout and potentially trade much higher, with the stock hovering just below that previous overhead resistance area. Keep in mind, however, that a failure to break out will send the stock back into its channel trading range.
Investors should look for clues to the next move in this stock with the moving average convergence divergence technical indicator. If you look at the chart, you can see the MACD looks ready to crossover and trigger a buy signal. Wait for that crossover to coincide with breakout price action before you get long this stock.
It's also worth noting that more than 10% of the 17 million tradable float is currently sold short as of Aug. 31. This is a situation in which a very small float with a large bearish bet could easily spawn a massive short squeeze. This could especially happen if the stock breaks out any time soon. A breakout could force the bears to cover and squeeze the stock up sharply.
Another stock that looks ripe for a breakout is
. This company is a Canada-based gold producer with operations and development activities in the Abitibi region of northwestern Quebec.
Clearly, this gold producer is benefiting tremendously from record-high gold prices that are now hovering around $1300 an ounce. Some analysts believe that a move toward $1500 could be in the cards in the near future. Personally, I think that any short-term volatility in gold won't stop the bullish moves in gold producers and miners like Aurizon Mines.
The market is forward-looking, so many of these miners and producers are going to be revalued toward a new world reality that gold is now a world currency. Just think about those implications and what they could do to stocks like Aurizon Mines.
Looking at the chart, you can see that Aurizon is approaching a breakout if the stock can manage to trade above some previous overhead resistance at around $6.97 a share. A move above that level would be huge for the bulls because it would mark a brand new all-time high.
What's even more bullish is that the breakout is coming on huge volume. During the last seven trading sessions, of which only one was down, this stock has seen up volume either at or well above the three-month average daily volume of around 598,000 shares.
Another bullish technical indicator you can see on the chart is a potential MACD crossover buy signal. The last time the MACD crossed over, the stock ran from around $4.80 a share to $6.77 before the MACD crossed back over and the stock sold off.
One final stock that has already broken out is
Altisource Portfolio Solutions
. This company provides services related to real estate and mortgage portfolio management, asset recovery and customer relationship management primarily in the U.S.
Altisource couldn't possibly be in a sweeter spot fundamentally, since the company deals with property valuations and managing foreclosed properties to banks and mortgage servicers. The stock seems to be tracking right along with foreclosure data, which continues to move higher.
Looking at the chart, you can see that shares of Altisource have already started to break out above some previous overhead resistance at around $29 a share. This breakout is coming on extremely heavy volume that shouldn't be ignored by market players. On Sept. 23, the day of the breakout, the stock traded over 400,000 shares, compared with the three-month average daily volume of 115,000 shares.
What's even more significant about the action in Altisource is the stock is now trading near record highs. This means that almost everyone who has bought the stock is making money. This is the best class of shareholders that anyone could ask for. Bottom line: As long as foreclosures continue to rise, this stock will continue to soar higher.
To see more breakout action in stocks such as
, check out the
portfolio on Stockpickr.
-- Written by Roberto Pedone in Winderemere, Fla.
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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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