By Roberto Pedone
) -- When breakouts occur in the market, the moves in the underlying asset are often more powerful than anyone can reasonably predict. Just take a look at the recent action in wheat, which has been driven sharply higher due to an unbearable heat wave that has swept across Russia, killing 5,000 people. This tragedy forced Russia to ban wheat exports and sent the price of wheat into breakout territory. Since June, the price of wheat has soared by more than 80%.
The official breakout for wheat happened once the commodity managed to trade above $5.50 a bushel. Once this commodity cleared that price level, it absolutely skyrocketed in less than a month. This demonstrates how powerful breakouts can be and even how quickly the price of an underlying asset can move to the upside. Granted, this was a major event, but combined with short-covering and fresh buying, breakouts can produce gigantic gains for market players.
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 great
First up is
, which together with its subsidiaries, operates as a worldwide foodservice retailer.
On Monday, the stock hit a new all-time high at $73.34 after it reported its
in more than a year, driven by fruit smoothies and ice-cold frappes. Global same-store sales also rose by 7% for July, easily beating Wall Street estimates of 4.8%.
As the stock surged on the news, McDonald's breakout above some key overhead resistance at around $71.24 to $71.50 share was accompanied by very strong volume of 8.9 million shares, compared with the three-month average daily volume of around 7 million shares and the 10-day average daily volume of around 6 million shares.
With the stock now trading near all-time highs, pretty much everyone who has ever bought this stock for a long-term investment is making money. This is always good company to be in. If the strong fundamental story continues for McDonald's, I think the stock can print $100 a share in the not too distant future.
Another stock that could be setting up to breakout is
. This company provides services for accelerating and improving the delivery of content and applications over the Internet. Akamai has benefited tremendously from the rapid growth in Web video and the increased usage of smartphone devices.
Recently, the stock sold off sharply following what many on the Street thought was a very strong earnings report. On July 29, Akamai reported a profit of $38.1 million, or 20 cents a share, compared with $36 million, or 19 cents a share, from a year earlier. Shares of Akamai plunged from around $46 a share to around $37 as traders sold the good news. That move lower came on very heavy volume of 23 million shares, compared with the average three-month volume of around 4.8 million shares.
That heavy volume plunge could now indicate that everyone who wanted to get out of the stock has now moved along and cashed in their positions. Since the drop, shares of Akamai have rallied nicely back towards $42 a share and now the stock is trading very close to its 50-day moving average of $42.49. If shares of Akamai can manage to trade above the 50-day moving average, I think it will set up to test some previous overhead resistance at around $46 to $47 a share.
A move above that tough overhead resistance would put the stock in breakout territory. I think this has a high probability of occurring when you consider how strong the stock has acted since its big drop off the earnings report. If the breakout does occur, I would look for shares of Akamai to test the next area of major resistance at around $50 a share.
Another stock that investors should put on their radar for a breakout play is
, an integrated biotechnology company engaged in developing, manufacturing and commercializing medicines for the treatment of prevalent, chronic diseases such as alcohol dependence, schizophrenia and bipolar disorder.
The company is currently waiting for regulators to make a decision on two key drugs in its pipeline: alcohol addiction treatment Vivitrol, which is already on the market but is up for secondary approval for opioid addiction; and Bydureon, a diabetes drug. The FDA is scheduled to make decisions for both of these drugs in October.
Recently, the stock broke out and cleared some overhead resistance at around $14.19 a share and hit a new 52-week high of $14.46. This near-term breakout came on very heavy volume of 1.5 million shares, compared with the three-month average daily volume of around 986,000 shares. If this stock can continue its uptrend, shares should be able to trade back toward the next area of major resistance at around $17a share.
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Keep in mind that this stock has a very high short interest of over 14% of the float as of July 15. Any positive drug approval news could send this stock skyrocketing as the bears cover their short positions since the tradable float is small at only 93 million shares.
One final stock that could be setting up to breakout in the near future is
. This company is a designer and manufacturer of energy-efficient power conversion and power management solutions for renewable energy, routers, data storage, servers, wireless communications, semiconductor test equipment and custom applications.
Year-to-date this stock is up an unbelievable 181%, but I think it has even more room to run higher. Recently, the stock has been trading sideways between $11 and $13 a share. The 52-week high sits at $13.04 a share, so investors could be best served buying the stock closer to $11 and anticipating a potential breakout over $13. A move above $13.04 would put the stock at a new 52-week high and setup the shares for a run at the next area of major resistance at $13.71.
I think a move over $13.71 would be very significant since this level was last touched in March of 2004. In fact, if Power-One can take out that level, I think the stock could quickly be on its way towards $17 to $20 a share. That quick move could easily be spurred by the bears in this stock that're short around 8.5% of the float as of July 15. Power-One has a very small tradable float of 23 million shares, so any short squeeze could produce an out-sized move to the upside.
Keep in mind, that Power-One recently reported record net sales of $215 million for the second-quarter of 2010, an increase of 135% from the second-quarter of last year. If the fundamental picture for Power-One continues to shine, the stock could be poised for a major breakout.
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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.
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