Kratos Defense & Security Solutions

One more under-$10 stock that traders should keep an eye on is Kratos Defense & Security Solutions ( KTOS), a specialized national security company engaged in providing mission critical products, services and solutions for the U.S. national security priorities. This stock has been crushed by the bears in 2011 with shares off by over 50%.

If you take a look at the chart for Kratos Defense & Security Solutions, you'll see that this stock plunged from its August high of $11.09 to a recent low of $4.61 a share. After hitting that low, the stock has started to rebound sharply and the upside volume has been expanding. Two recent up days in December registered volume of 4.2 and 1.0 million shares, which is well above its three-month average action of 407,498 shares.

Market players should now watch KTOS for a breakout trade if the stock can manage to sustain a high-volume move and close above its 50-day moving average of $5.91 and above some near-term overhead resistance at $6.39 a share. Look for volume on any move above those levels that's near or above 407,498 shares. If we get that action, look for this stock to spike big back towards $7 to $8 a share, or possibly much higher.

If you like this stock from the long side, then look to buy it on any weakness with a mental stop just below $5.50 and anticipate the breakout. You can also buy off strength and get long on a close above the 50-day with volume. Use a mental stop just below $5.92 if you get long off strength. I would add to either position once KTOS takes out $7.25 with volume.

The bears are also heavily involved in KTOS since 11.8% of the tradable float is currently sold short. This is a decent short interest for a stock under $10 a share, so watch for a sharp spike higher if that breakout trade triggers soon.

To see more hot under-$10 stocks, check out the Stocks Under-$10 Setting Up To Trade Higher 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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