By Roberto Pedone
WINDERMERE, Fla. (
) -- If you're looking for a trading pattern that can lead to big profits, then you need to take a look at the breakout chart pattern. A breakout chart pattern indicates either a rise in a stock's price above a resistance level, which is usually marked as the stock's previous high, or a drop below a support level, usually its previous low. This trend-trading strategy tries to isolate the strongest and weakest stocks in any market.
What exactly does a breakout mean for a security? Basically, a breakout is when a stock makes a move through an identified level of support or resistance, which is usually followed by heavy volume and increased volatility. Wall Street traders love to see upside breakouts because it demonstrates strength in the underlying asset as the price breaks above a level of previous resistance. A breakout can also take a stock to a new high that will generate a lot of interest as the stock shows up on websites and scanning software used by the most active traders.
Here 's a look at a number of stocks that could be setting up to become great
A breakout below a support level is usually seen as a warning sign for a security. This is simply because when a stock breaks support that has held up for a significant amount of time, it could mean that the strong holders of the shares have given up and dumped their positions.
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Technical Primer: Trend Line Support
A great example of a breakout below support can be found in international oil and gas company
. Back in June, the stock broke below some longer-term support between $35 and $34 a share and then broke below even more support at $31. Once those levels were breached, the stock quickly plunged all the way down and hit $27. Investors who sold the stock on those breaks saved themselves a considerable amount of money. Since then the stock has managed to rally back to $37, and shares are now approaching resistance at the 50-day moving average of $38.
Let's take a look at a few stocks that could be setting up to form breakout chart patterns.
First up is
, a provider of semiconductors for wired and wireless communications. Shares of Broadcom have started to break out above some previous resistance at around $37 a share. This move is very significant because the resistance around $37 dates all the way back toward the end of 2006 and early 2007, when the stock failed twice near that level.
If this breakout in Broadcom is the real deal, then it's possible the stock could be setting up to trade back toward the next area of significant resistance, close to $44 a share. It's also worth noting that the stock is now hitting new 52-week highs on higher-than-average daily volume. The average daily trading volume is 10 million shares, and during two recent up moves, the volume eclipsed that amount.
Shares of Broadcom are a bit over extended in the short term, and a pullback could be imminent. But with the stock trading above the 50-day and 200-day moving averages and with the breakout now setting up, Broadcom looks very bullish.
Who Owns Broadcom?
Navellier & Associates
Another stock worth watching that could be setting up to break out is
. This company develops, delivers and supports the information technology industry's range of information infrastructure and virtual infrastructure technologies and solutions.
Shares of EMC haven't broken out yet, but if the stock continues its current uptrend, it could be on the verge of a major breakout. The first area market players should watch is the $20 level, which has in the past marked a stiff area of resistance. Back in April, shares of EMC reached $20 and then quickly sold off all the way down toward $17, where the stock found support. The stock has now rebounded sharply and looks ready to challenge the $20 level with shares trading around $19.87.
A move above $20 for EMC could send this stock back toward the next area of resistance at $26. Keep in mind that EMC is trading above both the 50-day and 200-day moving averages, which is considered to be a technically bullish sign. Watch for the stock to break out on above-average daily volume of 25 million shares.
Another stock that looks poised for a breakout is
, a provider of electronic, mechanical and mechatronic products for the commercial truck, trailer, bus and passenger car manufacturers. Shares of Wabco have recently punched through some previous resistance at around $35.60 a share, and the stock now looks ready to challenge the next level of major resistance at $37. A move above $37 would mark a major breakout for this stock.
In fact, a move over $37 on above-average daily volume of 692,000 shares should be considered very bullish. If the stock can manage to break out, it could be setting up to head back toward the next area of resistance around $45 a share.
The technical picture for Wabco isn't the only thing looking bullish; the fundamentals also look strong. Recently, the company raised its adjusted earnings outlook for the year due to stronger-than-expected growth in its markets worldwide.
Last but not least is
, a provider of risk-management and human capital consulting services. Unfortunately for Aon, this breakout is not happening to the upside but rather looks to be setting up to the downside. Shares of Aon recently lost some key support at around $37 a share after the stock plunged to $35 on extremely heavy volume.
Over 22 million shares traded as the stock dropped sharply from $38 to $35, and that volume massively eclipsed the average daily amount of 2.2 million. Now the stock is bouncing today back up toward $36.50, but if this bounce doesn't hold, I would expect this stock to challenge the next areas of support at $34 and $32 a share.
If Aon loses those levels, things could get very troubling for any longs in the name. Keep in mind that the stock is trading below both the 50-day and 200-day moving averages, which is considered to be a bearish trading indicator. If you're long Aon, it might be a very good idea to watch for a breakout to the downside of and of the key support levels mentioned above.
Who Owns Aon?
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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