7 Stocks Heading Toward a Breakout

WINDERMERE, Florida (Stockpickr) -- Everybody loves to a see a stock they own break out -- that is, aside from the bears who are shorting the stock. The bears are never comfortable when a stock they're shorting is breaking out, because it's an early warning sign that the stock has massive buying momentum that will help to push it much higher.

The bulls love to see breakout action in a stock they own, because it means that shorts will be squeezed out of their positions. Even more important, bulls love to see a breakout activity because it signals a stock they might own is under accumulation by the instuationl money managers such as large mutual funds and hedge funds.

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Bulls also know that once a stock breaks out, it will instantly attract new money from momentum traders and day traders who watch the market specifically for this type of behavior. And now even the high-frequency traders (HFTs) are getting in on the game. I would bet big money that HFTs have algorithms programmed to buy big blocks of stocks that are breaking out on big volume. If you've watched some of the recent stocks that have broken out during this rally since early September, you can almost tell when the HFTs move into a stock.

Personally, I was trading Netflix ( NFLX) during the September rally. As the stock started to break out to new highs, the action in the tape for Netflix would go berserk. The bid and ask on Netflix would literally get taken out in a matter of seconds, and the stock would move incredible amounts in a flash.

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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 breakout stock candidates that could have big upside potential.
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The first name on the breakout radar is Brigham Exploration ( BEXP), an independent exploration, development and production company that utilizes advanced exploration, drilling and completion technologies to systematically explore for, develop and produce domestic onshore oil and natural gas reserves.

The oil and gas sectors have not been the greatest place to be in the markets of late, but you wouldn't know that by looking at the chart for Brigham Exploration. Shares of Brigham Exploration have started to breakout above some previous overhead resistance at around $21.15 a share.

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This breakout for Brigham is very bullish because it's coming on extremely heavy buying volume. On last Thursday and Friday (up days), volume clocked in at 10.3 million and 4.1 million, well above the three-month average daily volume of around 3 million shares. This high-volume breakout has now pushed Brigham into all-time-high territory.

This means that just about anyone who has ever bought the stock is making money -- and even more important, anyone who has shorted the stock is losing money. The shorts in this stock currently make up 8.8% of the tradable float of 113 million shares as of Sept. 15. This heavy short interest could continue to push this stock significantly higher.

>>Who Owns Brigham Exploration?: Driehaus Capital

Another stock that is already in breakout territory is Northern Oil and Gas ( NOG), an independent energy company engaged in the acquisition, exploration, exploitation and development of oil and natural gas properties.

Shares of Northern Oil and Gas have started to rip higher above some previous overhead resistance at around $18 a share. Some of this move was spurred by an analyst upgrade on last Thursday, after Northland Securities initiated coverage of the company with a outperform rating.

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This bullish rating has helped to push shares of Northern Oil and Gas into all-time high territory. However, it's not the only reason that this stock is pushing much higher. The heavy short interest in this name is also spiking the stock towards new highs. Currently, 10.10% of the tradable float of 44 million shares is sold short as of Sept. 15. This high short low float situation could be the match that lights the fire and sparks a massive short squeeze for Northern Oil. This is the perfect storm for a stock if you're bullish on this name. I would expect the uptrend to continue to push this stock into much higher territory.

>>Also: 5 Oil Stocks for the Long Haul

One well-known stock that could be setting up to breakout is Wynn Resorts ( WYNN), a developer, owner and operator of destination casino resorts.

Shares of Wynn Resorts recently broke out above some previous overhead resistance at around $94 a share. Following that move, the stock hit $95.88 and then sold off back toward $85.77 a share. Now the stock has gathered up more momentum and is starting to move above that key overhead resistance level at $95.88.

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The move above $95.88 is being accompanied by some very bullish volume activity. On Friday, which was an up day, volume clocked in at 4.2 million shares, well above the three-month average daily volume of 2.6 million shares. Considering this bullish action, the stock could now be setting up to test the next significant resistance level at around $120 a share.

It's worth noting that Wynn Resorts is a heavily shorted stock. Over 23% of the tradable float of 75 million shares is sold short as of Sept. 15. This extremely high short interest and low float could setup a situation that causes a massive short squeeze back toward $120.

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One final breakout candidate you should put on your trading radar is Agco ( AGCO), a manufacturer and distributor of agricultural equipment and related parts worldwide.

Shares of Agco have started to breakout above some previous overhead resistance at around $41 a share on massive volume. On last Thursday and Friday (up days), volume clocked in at 1.9 million and 6.4 million shares, which is well above the three-month average daily volume of 1.8 million shares. The actual breakout came on the 6.4 million shares which is the type of volume action that should catch the attention of many traders.


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This high volume activity in Agco was spurred by a USDA report on last Friday that predicted a smaller-than-expected corn crop and tighter-than-expected stockpiles. The breakout in Agco is significant because the stock really doesn't have any significant overhead resistance until it reaches $55 a share.

Keep in mind that around 6.5% of the tradable float of 92 million shares for Agco is sold short as of Sept. 15. When you combine this low float with the decent short position, shares of Agco could easily print $55 or even higher if the breakout continues to push the stock higher.

To see more breakout action in stocks such as Market Vectors Agribusiness ETF ( MOO), ViroPharma ( VPHM) and Ancestry.com ( ACOM), check out the Breakout Stocks of the Week 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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