WINDERMERE, Fla. (Stockpickr) -- U.S. stocks are trading modestly higher today as market bulls added to their gains for the week, following yesterday's move by the European Central Bank to inject liquidity in the European banking system.
The ECB and its partners in the U.S., Britain, Japan and Switzerland opened new lines of credit to European banks, allowing them to borrow dollars for as long as three months. The hope among the bulls on Wall Street is that this move shows that European leaders are serious about containing their sovereign debt crisis. The less optimistic crowd is viewing this action as nothing more than a bandage on massive wound.
Nothing demonstrates the bear view more than
that bearish bets by hedge fund managers at the end of August on
index futures increased to the highest level in almost four years.
The last time bearish bets were that high was in September 2007 before the S&P 500 plunged dramatically. The bears clearly think that Europe is going to be hit with a major debt crisis that could result in a large drop in equity prices around the globe. Some of the bears are even predicting a massive slide in the euro -- if, for example, a debt-laden country such as Greece were to be kicked out of the eurozone.
Those huge bearish bets could end up backfiring on the bears if a crisis never materializes. This will lead to a face-ripping short-covering stock market rally as the bulls flood the market with buy programs to squeeze the bears out of their positions. This is just one scenario you should be considering, so follow the trend, volume and price action in the markets. If you start seeing lots of market leaders roll over like
did this week, then get more defensive.
The top traders in the world know that markets are made up of thousands of stocks and tons of sectors. With so many moving parts, there's always some sector or stock that's acting strong and setting up to break out.
is not a new game on Wall Street; the strategy has been pioneered by legendary traders such as William O'Neal, Stan Weinstein and Nicolas Darvas.
Here's a look at a number of
and trade higher from current levels.
A biopharmaceutical player that could be setting up to break out is
, which is engaged in the development and commercialization of therapeutic drugs for large underserved markets, including for sleep apnea, diabetes and men's sexual health. This stock hasn't done much so far this year, with shares off by around 5%.
If you take a look at the chart for Vivus, you'll see that this just ran up big from its August low of $6.13 a share to its current price of just over $8.70 a share. During that uptrend, the stock was acting very bullish, making higher highs and higher lows. As long as that pattern of higher highs and higher lows continues, then this stock is going to continue to trend higher.
Market players should now watch for a breakout in Vivus that sustains a move above some previous overhead resistance at $9.07 a share. Just yesterday, the stock hit $9.62 a share on massive volume of 4.9 million shares, but since then it's pulled back below the breakout level of $9.07. This could mean the breakout attempt was a failure, or it could mean the stock wants to fill a gap to $8.50 before it starts another trend higher.
If you're bullish on Vivus, you could buy the stock once it clears $9.07 again on big volume. Look for volume that's tracking in close to or well above its three-month average volume of 1.5 million shares. If this stock does break out again, then I would add to any long position once it clears $9.62 on solid volume.
You could also buy the stock off any significant weakness and anticipate the breakout. I would use a stop at around $8 a share in case the bears take back control of this stock in the near future.
Keep in mind that this is a heavily shorted stock with over 19.3% of the float sold short by the bears. If this stock breaks out in the coming weeks or days again, then watch for a high volume move that could lead to a
I also included Vivus on a recent list of
Silicon Motion Technology Group
Another potential breakout trade could be setting up for
Silicon Motion Technology
, a fabless semiconductor company that designs, develops and markets semiconductor solutions for the multimedia consumer electronics market. This stock has on a tear so far in 2011, with shares up over 215%.
If you take a look at the chart for Silicon Motion, you'll see that this is one ridiculously strong stock that's been uptrending for some time. In just the last two months, this stock ran up from its low of $8.27 a share to its current price of just over $13.30 a share. Even after that large move up, the stock might be setting up right now for still higher prices.
Market players should watch this stock for a major breakout if it can manage to trade and close above some past overhead
at $13.44 a share. A sustained move above that level would trigger a major breakout that could set the stock up for a big spike higher. What I like about the setup here for SIMO is that
for the past four trading session has been tracking in very strong and all were up days.
You could buy this stock once it closes over $13.44 on big volume. Look for volume that's tracking in close to or well above its three-month average action of 412,300 shares. As of last check, the stock has cleared that level and volume is over 624,000 shares. Watch how the stock closes today because we might just get that big breakout to trigger in a few hours.
Silicon Motion shows up on an August list of
China Automotive Systems
A stock in the auto and truck parts sector that could be setting up to break out soon is
China Automotive Systems
, which engages in the manufacture and sale of power steering systems and other component parts for the automotive industry in the People's Republic of China. This stock has been destroyed by the bears so far in 2011, with shares off by over 60%.
If you take a look at the chart for China Automotive, you'll see that this stock has been destroyed, dropping from its April high of $10.44 a share to its current price of just over $5 a share. That massive slide lower in the stock has now taken it below both its 50-day and 200-day
, which is bearish. That said, the stock has also started to make higher lows in the short-term, which could be signaling a change in the bearish behavior. Shares of CAAS are also approaching a big breakout if the stock can manage to trade and close above some past overhead resistance at $5.43 and it's 50-day moving average of $6.07 a share.
Market players should watch for a breakout trade if CAAS can manage to trade and close above those levels I mentioned above on
. Watch for volume that's tracking in close to or above its three-month average action of 190,000 shares. If this breakout does happen, then this stock could soar to $8 to $9 a share quickly.
One could be a buyer of this stock on any weakness and anticipate the breakout. I would use a stop just below $5 a share since a drop under that level would snap the recent pattern of higher lows. Another way to play this is to buy strength and buy it once it breaks out over $5.43 and $6.07 a share with volume.
This is another heavily shorted stock with around 9.3% of the float sold short by the bears. Any breakout for this stock in the coming days or weeks could easily spark the short-sellers to cover some of their profitable bets and buy the stock back for a big bounce.
One potential breakout play in the metal mining complex is
, a producer of specialty zinc- and nickel-based products sold primarily to customers throughout the U.S. This stock has been trending lower so far in 2011, with shares off by around 20%.
If you take a look at the chart for Horsehead, you'll see that this stock was hammered lower from its April highs of $16.82 a share to its current price of just over $10.30 a share. During that big drop, the stock was mostly making lower highs and lower lows. That said, during the past two months, the stock has started to make higher lows and higher highs, which could be signaling a bullish trend change. Even more bullish is the 6% spike in the stock today on big volume. Volume today has already clocked in at over 685,000 shares which is well above its three-month average volume of 567,000 shares.
Market players should now watch for a breakout trade to trigger with a move above $10.70 a share on strong volume. Keep in mind that if the stock trades and closes above $10.70 it will also clear its 50-day moving average of $10.40, which is also bullish for the stock. A move above those levels should set this name up for a big run back towards $12 to $13 a share or possibly even higher.
One could be a buyer of this stock on any weakness in anticipation of the breakout, as long as it doesn't break that near-term pattern of higher lows. Or you could just buy strength and buy a big volume move over $10.70. I would not ignore that volume spike today if we do get a close near or above $10.70.
This is another stock with a high short interest since 9.8% of the float is currently sold short by the bears. I think this stock has a high probability of seeing a
on a move above $10.70 with volume.
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One more breakout candidate is biotechnology player
, which is dedicated to speeding the delivery of new treatment options to patients by working to improve existing therapeutics through the application of highly specialized drug targeting platforms and formulation expertise. This stock is off to a bullish start in 2011, with shares up by over 29%.
If you take a look at the chart for Raptor Pharmaceutical, you'll see that this stock dropped notably in the last couple of months from its high of $6.99 a share to its recent low of $3.66 a share. Since that drop, the stock has now started to form a basing chart pattern between $3.66 and $4.80 a share. Whenever a stock starts to base like this, the next major move will come from either a break above or below the defined ranges.
Judging by the action today, with the stock up 7% trading at $4.70, it looks like it's poised to break out above the upper end of the basing pattern range. Market players should watch this stock for a move and close above $4.80 on strong volume. Look for volume that's tracking in close to or above its three-month average action of 633,000 shares. The next bullish signal will trigger once the stock then takes out its 50-day moving average of $5.06 on solid volume.
You could buy this stock on any weakness with a stop just below the 200-day moving average of $4.32 a share. You could also buy strength and just buy off the breakout above $4.80 and $5.06 a share. If we do get the breakout, then this stock could easily run up towards $5.75 or $7 a share quickly.
This is also a heavily shorted name with over 8.1% of the float is sold short by the bears. Those short-sellers have also been increasing their bets from the last reporting period by around 10.7%, or by about 259,400 shares. If the bears are caught leaning the wrong way, then look for a big short-squeeze in the coming days or weeks.
To see more breakout candidates, including
Gushan Environment Energy
( GU), 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.