Identifying breakout stocks is probably one of the elementary techniques utilized by active investors. The reasoning behind this approach to stock selection is to identify which stocks are trading within a narrow band. These stocks are to be bought as soon as they move above this band and are sold when they fall below. In case a stock moves above this band, it usually gains momentum and offers the promise of considerably high returns.

Identifying Prospective Candidates

In order to identify breakout stocks, you must first determine their resistance and support levels. A resistance level is the barrier which must be broken so as to be identified as a breakout stock. Meanwhile, a support level is the floor for the stock’s movement.

At the breakout level, the demand for the stock has peaked, making it a natural choice for traders. On the other hand, when a stock hits the support floor, traders are eager to offload it. In order to spot breakout stocks, you would have to see which of these are on the brink of breaking the resistance barrier or those that have just breached this level.

Has a Breakout Really 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 at all 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 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 7822 stocks to only 14.

Here are the top 4 stocks that meet these criteria:

MiX Telematics Limited (MIXT - Free Report) provides fleet and mobile asset management solutions. It has a Zacks Rank #1 (Strong Buy) and its average EPS surprise over the last four quarters is 81.7%.

Stora Enso Oyj (SEOAY - Free Report) is an integrated forest products company producing magazine papers, newsprint, fine papers and packaging boards. It has an average EPS surprise over the last four quarters 53.9% and sports a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

AU Optronics Corp. (AUO - Free Report) is a world-leading manufacturer of large-size thin film transistor liquid crystal display panels. AU Optronics has a Zacks Rank #2 (Buy) and its average EPS surprise over the last four quarters is 16.7%.

Heritage Oaks Bancorp (HEOP - Free Report) acts as a bank holding company of Heritage Oaks Bank which offers banking products and services to individuals and businesses. It has a Zacks Rank #2 and its average EPS surprise over the last four quarters is 2.3%.