Avanir Pharmaceuticals

Another under-$10 stock worth watching is Avanir Pharmaceuticals ( AVNR), a pharmaceutical company focused on developing and commercializing therapeutic products for the treatment of central nervous system disorders. This stock has taken it on the chin so far in 2011, with shares off by over 28%.

If you take a look at the chart for Avainr, you'll see that this stock has been downtrending since mid-May, when it hit a high of $4.80 a share. Since hitting that high, shares of AVNR have been stuck in a bearish pattern, making lower highs and lower lows. That said, the stock just started to show some signs of changing that pattern. First, the stock has started to make higher lows since bottoming at $2.46 a share in August.

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Second, and more important, the stock is very close to triggering a major breakout if it can manage to trade above $3 to $3.02 a share on strong volume. What I like about this potential breakout is that the upside volume has already started to spike as we approach those levels. For example, on Tuesday an up day, volume was just over 6 million shares -- well above the three-month average volume of 2.6 million shares.

Market players should now watch for this stock to take out $3.02 a share on heavy volume. If we see a sustained move above that level with solid volume, then this stock could spike back above $4 a share quickly.

You could either wait to buy the breakout on AVNR, or you could buy it on any weakness with a stop just below $2.66 a share. If you buy the next breakout over $3.02, then I would add aggressively to any long position once it trades above its 50-day moving average of $3.16 a share. Keep in mind that the current basing pattern on this stock is a bullish indicator if AVNR breaks out above that upper range. I say this because when a stock trades out of a base, it usually acts as a launching pad for the shares.

This is an extremely heavily shorted stock, with over 28% of the float sold short by the bears. Any future breakout could easily spark a massive short-covering really that spikes this stock significantly higher from current levels.

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