As popular as it is divisive, a breakout strategy is one of the most used techniques for active investors. The idea is fairly simple -- to identify stocks trading within a narrow band and buy them when they move above this channel or sell when they move below. If a stock moves above the channel, it promises substantial gains for investors.
The first step to selecting the right breakout stock is to calculate its support and resistance level. A support level is the lower bound for stock movements while a resistance level refers to the maximum price which it trades within over a considerable period.
In other words, the demand for a stock is at its lowest at its support level, which means most traders are willing to sell it. At the resistance level, most traders are willing to go long on the stock, which means that they would like to add them to their portfolios. The key to identifying breakout stocks is to zero in on those that are on the verge of a breakout or those that have just broken above the resistance level.
Determining Whether It’s for Real
Stocks which have breached their resistance level should ideally be in high demand among traders. But the test of whether this is a genuine breakout is whether they go on to attain higher prices and the old barrier becomes a new support. This is why it is important to determine whether a long-term price trend is about to emerge.
Only a study of long-term trends can determine whether the existing trading channel has been breached effectively. This indicates the strength of the support or resistance levels. If you can identify the effective channel for a stock, picking it even at a not-so-reasonable price would give you significant returns.
Screening Parameters
• Percentage price change over four weeks between 10% and 20% (Stocks which are showing considerable price increases, but whose gains are not excessive.)
• Zacks Rank less than or equal to #2• Current Price /52-Week High greater than or equal to 0.9 (Stocks which are trading 90% close to their 52 week highs.)
(Only Strong Buy and Buy rated stocks can get through.)
• Beta for 60 months less than or equal to 2
(Stocks which move by a greater degree than the broader market but within a reasonable limit.)
(Stocks which move by a greater degree than the broader market but within a reasonable limit.)
• Current price less than or equal to $15 (Stocks which are reasonably priced.)
These criteria narrow down the universe of over 8,800 stocks to only 8.
Here are the top 4 stocks that meet these criteria:
(PRMW - Snapshot Report) Primo Water Corporation
(MPX - Snapshot Report) Marine Products Corp.
(CVCY - Snapshot Report) Central Valley Community Bancorp
(KCG - Snapshot Report) KCG Holdings, Inc.
While backtesting over a two-year timeframe(Apr 18, 2014 to Apr 15, 2016), considering a four-week holding period,a portfolio following this strategy provided a total return of 35.7% compared with the S&P 500’s return of 8.6%.For investors with a reasonably high risk appetite, this strategy provides rich rewards.
You can get the rest of the stocks meeting these criteria by signing up now for your 2-week free trial to the Research Wizard and start using this screen in your own trading. Further, you can also create your own strategies and backtest them first before taking the investment plunge.
The Research Wizard is a great place to begin. It's easy to use. Everything is in plain language. And it's very intuitive. Start your Research Wizard trial today. And the next time you read an economic report, open up the Research Wizard, plug your finds in, and see what gems come out.
Disclosure: Officers, directors and/or employees of Zacks Investment Research may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material. An affiliated investment advisory firm may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material.
Disclosure: Performance information for Zacks’ portfolios and strategies are available at: http://www.zacks.com/performance.
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