Picking breakout stocks is essential for active investors to get excellent returns. This method involves zeroing in on stocks whose prices vary within a narrow band.
If the stock price falls below this channel, it could be the best time to sell it off. However, the best time to buy a stock per this strategy is when it is about to break above this trading band. Such stocks offer the prospect of impressive gains.
To that end, American Eagle Outfitters, Inc. AEO, Rover Group, Inc. ROVR and Nu Holdings Ltd. NU have been selected as the breakout stocks for today.
Zeroing in on Breakout Stocks
In order to select the right breakout stock, one has to first 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 it trades within a considerable period.
In other words, the demand for a stock is at its lowest at its support level, which means that most traders are willing to sell it. At the resistance level, most traders are willing to go long on the stock, meaning they would like to add it to their portfolio. The key to identifying breakout stocks is to zero in on those on the verge of a breakout or those that have just broken above the resistance level.
Has a Genuine Breakout Occurred?
The primary risk associated with such a strategy is that the decision to buy an apparent breakout candidate has been incorrectly timed. When a stock moves above the resistance level, it should be a highly prized commodity for traders. However, whether such a breakout is genuine is another matter altogether.
For a bona fide breakout, the stock’s earlier resistance barrier should become its new support level. This only happens if the trading channel that has been established is tested by observing long-term price trends. The strength of the support and resistance levels can be ascertained only through such a study. Despite the risk of misidentification, correctly identifying such stocks can yield considerable returns, even at a price that may not seem attractive at first glance.
Screening Criteria
• Percentage price change over four weeks between 10% and 20% (Stocks showing considerable price increases but whose gains are not excessive.)
• Current Price /52-Week High greater than or equal to 0.9 (Stocks trading 90% close to their 52-week highs.)
• Zacks Rank less than or equal to #2 (Only Strong Buy and Buy rated stocks can get through.)
No matter whether the market is good or bad, stocks with a Zacks Rank #1 (Strong Buy) or 2 (Buy) have a proven history of outperformance. You can see the complete list of today’s Zacks #1 Rank stocks here.
• Beta for 60 months less than or equal to 2
(Stocks that move by a greater degree than the broader market but within a reasonable limit.)
• Current price less than or equal to $20 (Stocks reasonably priced.)
These criteria narrow the universe of more than 6,853 stocks to only five. Here are the top three stocks:
American Eagle Outfitters is a specialty retailer of casual apparel, accessories, and footwear for men and women. American Eagle Outfitters currently sports a Zacks Rank #1. AEO has an expected earnings growth rate of nearly 33% for the current year.
Rover Group provides an online marketplace for pet care. Rover Group currently carries a Zacks Rank #2. ROVR has an expected earnings growth rate of 120% for the current year.
Nu provides a digital banking and technology platform. Nu currently sports a Zacks Rank #1. NU has an expected earnings growth rate of 425% for the current year.
You can get the rest of the stocks on this list 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 test 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.
Click here to sign up for a free trial to the Research Wizard today.
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: https://www.zacks.com/performance.
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American Eagle Outfitters, Inc. (AEO) : Free Stock Analysis Report
Nu Holdings Ltd. (NU) : Free Stock Analysis Report
Rover Group, Inc. (ROVR) : Free Stock Analysis Report
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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