Selecting breakout stocks is one of the most popular methods utilized by active investors. The technique identifies those stocks whose prices are fluctuating within a specific band. In case a stock falls below the floor of this band, it may be time to offload it from your portfolio. However, a stock breaking above this channel carries the promise of delivering strong gains.

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 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.

Is this a Genuine Breakout?

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 at all genuine is another matter altogether.

For a genuine 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 which may not seem attractive at first glance.

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.)

• Current Price /52-Week High greater than or equal to 0.9 (Stocks which are 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.)

• 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.)

• Current price less than or equal to $20 (Stocks which are reasonably priced.)

These criteria narrow down the universe of over 7858 stocks to only nine.

Here are the top five stocks that meet these criteria:

eGain Corporation (EGAN Quick QuoteEGAN - Free Report) provides customer engagement solutions. It offers web customer interaction applications, social customer interaction applications and contact center applications. eGain has a Zacks Rank #1 (Strong Buy) and its expected earnings growth for the current year is 4.6%.

Streamline Health Solutions, Inc. (STRM Quick QuoteSTRM - Free Report) is a provider of healthcare technology solutions for hospitals and related facilities across the United States and Canada. Its expected earnings growth for the current year is 38.7%. Streamline Health carries a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

Palatin Technologies, Inc. (PTN Quick QuotePTN - Free Report) is a developer of receptor specific peptide therapeutics for treating a variety of diseases in the United States. Palatin Technologies has a Zacks Rank #2 (Buy) and its expected earnings growth for the current year is more than 100%.

Commercial Vehicle Group, Inc. (CVGI Quick QuoteCVGI - Free Report) supplies interior systems, vision safety solutions and other cab-related products for the global commercial vehicle market, including the heavy-duty (Class 8) truck market, the construction market and other specialized transportation markets. Commercial Vehicle Group has a Zacks Rank #2 and its expected earnings growth for the current year is 24.1%.

Sibanye Gold Limited is a gold mining company based in Westonaria, South Africa. Sibanye Gold has a Zacks Rank #2 and its expected earnings growth for the current year is more than 100%.

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.

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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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