6 Stocks Gearing Up to Break Out
WINDERMERE, Florida (Stockpickr) -- The U.S. stock market continues to show strength in the face of the uncertainty of the midterm elections and the Federal Reserve's decision regarding another round of quantitative easing. These two major events could either spark a reaction of "sell the news" or fresh buying once traders have digested the news and decided if buying or selling is the best action.
All of the major market averages are within shouting distance of major yearly breakouts. The key areas that market players should watching are the 1220 level for the
S&P 500
, the 11,250 level for the
Dow Jones Industrial Average
and the 2535 area for the
Nasdaq
.
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While market players might be disappointed if Ben Bernanke announces a lighter round of quantitative easing than the market is expecting, a lighter issuance of QE2 could mean the economy is stronger than many have thought, and a mild selloff in stocks could be met with aggressive buying. A lighter round of QE2 has a very high probability of bringing down commodity prices, since in the short term it would be considered bullish for the dollar.
If QE2 comes in at or above $1 trillion, though, I would expect commodity prices to resume their uptrend and the dollar to resume its downtrend. This would also certainly be very bullish for stocks and frankly dangerous for bears that are short just about anything in the market. Regardless of what happens this week, there are plenty of stocks that are already acting strong and breaking out.
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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 and Nicolas Darvas. 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 solid
that have big upside potential.
The first stock that is starting to break out is
KBR
(KBR) - Get Report
, which, along with its subsidiaries, is a global engineering, construction, and services company supporting the energy, hydrocarbon, government services, minerals, civil infrastructure, power and industrial sectors.
This stock has been a big winner year-to-date, with shares up a whopping 35%, and the way the chart is shaping up, that strength will likely continue.
Looking at the chart, you'll see that shares of KBR have started to break out above some major overhead resistance at around $24.50 a share. This resistance has held the stock down below $24.50 for the past two years, so as you can see, this is a big level for the stock.
This major breakout has come on some very heavy volume. During the last four trading days prior to today, three of those days were up days where volume clocked in above the three-month average trading volume of 1.4 million shares.
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Some of that heavy volume was spurred by KBR's earnings report on last Thursday. The company reported a better-than-expected third-quarter result with a 33% jump in profits, and it also raised their 2010 guidance per share to $1.75 to $2, compared with a consensus estimate for $1.85 per share.
If this breakout can hold and the stock can continue to trend higher, then I see no reason why shares of KBR can't make a run toward 2008 highs around $37.50 a share. From a technical standpoint, a run towards $37.50 has a good chance of occurring as long as the stock can remain above $24.50.
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Another stock that looks ready to make a major breakout is car and truck producer
Ford Motor
(F) - Get Report
, which has been another major winner year-to-date, with shares up a gigantic 42%.
Last Thursday, Ford Motor reported some impressive results, with record earnings of $1.7 billion in the third quarter off of strong demand for its new line of cars. The company said it's on track to win full-year market share in the U.S. for the second consecutive year, making it the first time since 1993 that Ford has accomplished back-to-back annual increases.
If you take a look at the chart, you'll see that shares of Ford Motor are on the cusp of a major breakout as the stock approaches some heavy overhead resistance at around $14.50 a share. If Ford can manage to take out that level, it could set the stock up to trade significantly higher.
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Earlier this year, shares of Ford formed a double-top at $14.50 and since then the stock has not been able to trade back to this key level until now. With the stock now trading near $14.25 a share, it looks like the breakout could finally happen.
Keep in mind that the last time Ford shares traded above $14.50 was back in 2005, so this is clearly a very big level for the stock.
Combined with the company's recent strong earnings, the major catalyst that could easily push this stock significantly higher is the
General Motors
IPO, which is projected to come to market in late 2010. If the GM IPO is successful, it could spur a round of sympathy buying in Ford. Either way, if shares of Ford can get above $14.50, the stock will look very strong from a technical perspective.
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It's also worth noting that over 8% of the tradable float of 3.32 billion shares on Ford is currently sold short by the bears. A move above $14.50 could easily force the bears to start covering their short positions and spark a short squeeze that pushes the stock much higher.
One final breakout candidate you should put on your trading radar is
VimpelCom
(VIP)
, a telecommunications operator that provides data services through a rnage of wireless, fixed and broadband technologies. VimpelCom operates its mobile telecommunications services in Russia, Kazakhstan, Ukraine, Armenia, Tajikistan, Uzbekistan and Georgia.
If you take a look at the chart, you'll see that shares of VimpelCom are approaching a near-term breakout if the stock can manage to trade above $15.40 a share. A move above that level could set the stock up to fill a big gap down from back in late August, and potentially set up a run higher back toward around $18 a share.
On Oct. 5, the stock sold off on 15 million shares of volume, compared with the three-month average daily volume of 3.1 million shares. This extreme amount of volume could mean that everyone who wanted to sell this stock in the short term has already done so. Since that huge volume day, the stock has been trending higher and is now approaching the breakout I mentioned above.
>>Who Owns VimpelCom?:
Traders should keep a close eye on this stock now and watch for a move above $15.40. I think a sharp move higher that could try to fill that gap from August could happen fast if the stock continues to act bullish. However, if the stock fails to breakout above $15.50, then I would expect it fall back towards the bottom of its current trading range at around $14 a share.
To see more breakout action in stocks such as
Deckers Outdoor
(DECK) - Get Report
,
CNOOC Limited
(CEO) - Get Report
and
New Gold
(NGD) - Get Report
, 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.
