3 Stocks Poised to Break Out

WINDERMERE, Fla. (Stockpickr) -- Trading stocks that are breaking out is one of my favorite ways to play the market when I am looking for names that could be poised to move significantly higher.

Breakout trading offers two key advantages that you won't get from many other trading strategies. The first is that the momentum crowd and trend traders -- I am both -- love to jump into stocks that are breaking out because they're displaying relative strength. Both of these sets of traders control a ton of money on Wall Street -- especially among the hedge fund and mutual fund community. Since they control so much cash, it gives them the power to really move a stock once they all collectively jump into a name.

The second of trading stocks that are breaking out is that bears love to short them. Often the bears think that a stock that's breaking out is going to fail and or form a double top, so they'll jump in on the short side. Sometimes they are right, but more often than not, they're wrong and get hurt for fighting the trend. This is especially true in bull markets that are trending higher like we have right now. When a market is trending higher, many short-sellers like to deploy their crystal ball and short into strength. I love this, because it provides the fuel that sparks the short-squeeze fire.

Related: 3 Stocks That Could Rebound in 2011

A little review: 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.

Big volume on a breakout trade is very important because it increases the probability of a stock going much higher. However, it isn't mandatory that a stock has big volume on a breakout. Sometimes the big volume won't come in for a few trading sessions following a move through past resistance. What's most important to breakout trader is price and trend first. Volume is secondary, but the big volume does increase the chances of a successful breakout trade.

Here's a look at a number of solid breakout stock candidates that could have big upside potential.

F5 Networks

One stock that's starting to break out is F5 Networks ( FFIV), a provider of technology that optimizes the delivery of network-based applications and the security, performance and availability of servers, data storage devices and other network resources. This stock was a big market leader in 2010, and it's off to a super start in 2011, with shares already up over 10%. Traders love to turn to this high-growth name for a play on the booming trend towards applications for smartphones and tablet computers.

If you take a look at the chart for F5 Networks, you'll see that the stock has started to trade above some previous overhead resistance at around $143.75 a share. The last time that F5 Networks hit $143.75 was back in December, and right after hitting that price, the stock traded all the way down to $129 a share. Shares of F5 Networks quickly found support at $129 and have now powered back all the way up to close over $143.75 and into breakout territory.

What's so great about the breakout action in F5 Networks is that it shows that investors who love to buy high-growth stocks still want to be in this market leader. This is a healthy sign for the markets, and it's a healthy sign for F5 Networks. What investors need to watch for now is for up-day volume on FFIV to start coming in better than the three-month average daily volume of 2.6 million shares, which will increase the probability of the stock going much higher in the near future.

As of right now, the volume on recent up days hasn't been tracking in as strong as I would like to see it, or simply higher than 2.6 million shares. The move on Thursday that saw the stock break out only saw volume of around 1.7 million shares. However, the price and trend for FFIV is what matters the most, and those two key categories are currently acting very bullish. Market players should now look for FFIV to close above the breakout price of $143.75 on not just a daily basis but also a weekly basis.

If that does indeed happen, then I think this stock will set up nicely to trade significantly higher in the next couple of months. I don't think it's a stretch to say that this stock could trade up toward $200 a share if the uptrend remains intact.

Navellier & Associates is making a big bet on F5; the stock comprises 3.1% of the total portfolio. F5 was one of the top best-performing S&P 500 stocks as well as one of the five tech stock winners of 2010. With an A- buy rating from TheStreet Ratings, F5 is one of the top-rated communications equipment stocks.

Pride International

Another stock that's starting to move into breakout territory is Pride International ( PDE), which provides contract drilling services to oil and natural gas exploration and production companies through the use of mobile offshore drilling rigs in the U.S. and international waters. This stock wasn't a great performer last year, but it's off to a decent start in 2011, with shares up around 3%. Energy is back in focus in 2011, and rising natural gas and crude oil prices could be the reasons that traders are quickly moving back into this name.

If you take a look at the chart for Pride International, you'll see that the stock is just starting to push above some previous overhead resistance at around $33.70 a share. What makes this potential move even more significant is that Pride has been basing prior to this breakout between the levels of $33.70 on the upside and around $29.50 on the downside. When a stock forms a basing pattern like this and then breaks out, it shows that the stock is finally falling into the control of the bulls. It's also worth noting that during this basing pattern, the stock started to make higher lows. This means that investors were jumping in to buy this stock on any weakness.

Market players should understand that the $33.70 area has marked stiff overhead resistance for quite some time on this stock. Almost five times in the past six-months this stock has failed to trade above that level, so if now it can finally manage to stay above $33.70 it will mean that the bears might be ready to capitulate on Pride. The next area of significant overhead resistance on Pride will come in at around $34.50 a share.

If the stock can clear $33.70 and $34.50, on both a daily and weekly closing basis, then I think this stock will setup to trade back towards the next previous resistance levels at $42.50 or even $47.50 which is the five-year high. Traders should now watch for more big-volume up days like the stock had on Wednesday, when 3.8 million shares changed hands vs. the three-month average daily action of 2.4 million.

The volume on Thursday was just average at 2.38 million shares, so I would really like to see more days like we had on Wednesday. If we do get some really strong volume up days that follow through with this breakout, then the stock will have a great chance of trading into the low to mid-$40s very soon.

Major holders of Pride International include Robert Rodriguez at FPA Capital.

Whole Foods Market

One more stock that has also started to break out is Whole Foods Market ( WFMI), a natural and organic foods supermarket. This stock was a clear market leader in 2010, and so far in 2011 the stock is up around 3.4%. The catalyst for the move higher on Thursday for this stock was an upgrade out of Jefferies, which raised its 12-month price target to $60 a share from $47. The analyst cited improving store traffic for the price bump and what appears to be the willingness by consumers to trade up to more expensive items and spend more on discretionary items.

If you take a glance at the chart for Whole Foods Market, you'll see that the stock has started to blast through some previous overhead resistance at around $52 a share. The volume on this breakout was extremely strong, with more than 3.7 million shares changing hands, which easily surpassed the three-month average trading volume of 2.3 million shares. What's great about this breakout in Whole Foods is that it has caused the stock to hit a brand new 52-week high of $53 a share. This new 52-week high is going to generate a lot of interest in this name among the momentum and trend trading crowd, since they love to buy stocks with such characteristics.

Traders who want to play this stock should now watch for a weekly close that firmly puts the stock above the breakout point of $52 a share. If that does indeed occur, I think it will set up the stock to trade back toward its next significant overheard resistance level at around $65 a share. That's some decent upside from current levels, so market players should keep an eye on how this stock acts in the coming days and weeks.

I would also like to point out that the short interest as a percentage of the float for Whole Foods is currently around 7.8%. That's a pretty decent short interest on a stock that was one of the best-performing S&P 500 stocks in 2010, returning 84%. I don't have the answer to why any trader would want to short this market leader, but I can say that those shorts will continue to get hurt if this breakout starts another bullish trend higher for Whole Foods Market.

Whole Foods was one of the 10 top retail stocks of 2010, and last month, it was one of several stocks increasing their dividends. With a B buy rating from TheStreet Ratings, it's one of the top-rated food and staples stocks.

To see more breakout action in stocks such as Jazz Pharmaceuticals ( JAZZ), Finisar ( FNSR) and Fresh Del Monte Produce ( FDP), 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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