Discovery Laboratories

One under-$10 stock that's trending very close to trigger a major breakout trade is Discovery Laboratories ( DSCO), which is engaged in the development of surfactant replacement therapies to treat respiratory disorders and diseases for which there frequently are few or no approved therapies. This stock has been trending strong for the last three months, with shares up 23%.

This company was hit with some positive news this morning after it announced a secured loan facility with Deerfield Management for up to $30 million in financing. Deerfield is a leading health care investment firm with more than $3.5 billion of assets currently under management.

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If you take a look at the chart for Discovery Laboratories, you'll notice that this stock has been trading inside of a large consolidation pattern for the last two months, with shares moving between $2 on the downside and $2.45 on the upside. Shares of DSCO are now starting to move back above its 50-day moving average of $2.25 a share and its quickly moving within range of breaking out above its recent sideways trading pattern.

Traders should now look for long-biased trades in DSCO if it manages to break out above some near-term overhead resistance levels at $2.38 to $2.45 a share and then once it clears its 200-day at $2.54 a share with high volume. Look for a sustained move or close above those levels with volume that registers near or above its three-month average action of 226,155 shares. If that breakout triggers soon, then DSCO will set up to re-test or possibly take out its next major overhead resistance levels at $3.04 to $3.10 a share. Any high-volume move above $3.10 will then put $3.30 to $3.50 into range for shares of DSCO.

Traders can look to buy DSCO off any weakness to anticipate that breakout and simply use a stop that sits just below its 50-day at $2.25 or near some recent support at $2.15 a share. One can also buy DSCO off strength once it takes out those breakout levels with volume and then simply use a stop that sits just below its 50-day at $2.25 a share.

The shorts are very involved in shares of DSCO, since its current short interest as a percentage of its float is rather high at 8.3%. Look for the bears to start covering some of their bets if DSCO triggers that breakout soon.

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5 Health Care Stocks Under $10 to Watch