Utilizing a breakout investment strategy is a favored choice of active investors who are content only with returns superior to most other investments. This approach involves homing in on stocks trading within a tight range and acquiring them when they move out of this band. In keeping with this approach, they are sold whenever they move below this narrow band. If properly implemented, such a strategy could deliver impressive returns.

Spotting Breakout Stocks

The essence of this strategy lies in calculating the support and resistance levels of a stock. The lower bound of a stock’s trading channel is its support level and it should be sold as soon as it threatens to fall lower. On the other hand, the ceiling is a stock's breakout level and it can gain substantially if it breaks the resistance level.

When a stock is close to its support level, demand is literally hitting the floor. On the other hand, demand rises when it is breaching its resistance level, signaling the right time to make a lucrative addition to your portfolio. The idea is to pick stocks which have just broken above their resistance barriers or are very closing to doing so.

Checking Whether It’s for Real

Stocks which have crossed their resistance level should ideally be highly in demand among traders. But the test of whether this is a genuine breakout is when 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 lead to 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.)

• 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 7888 stocks to only 13.

Here are the top five stocks that meet these criteria:

Summit Therapeutics plc (SMMT - Free Report) is engaged in the discovery and development of drug to treat the fatal muscle wasting disease Duchenne muscular dystrophy and infections caused by the bacteria C. difficile. It has a Zacks Rank #1 (Strong Buy) and its average EPS surprise over the last four quarters is 16%.

Genco Shipping & Trading Limited (GNK - Free Report) is a ship owning company which transports iron ore, coal, grain, steel products and other drybulk cargoes along shipping routes. It has an average EPS surprise over the last four quarters 5.6% and sports a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

Chimerix, Inc. (CMRX - Free Report) engages in the discovery, development and commercialization of oral antiviral therapeutics for various medical needs. Chimerix has a Zacks Rank #2 (Buy) and its average EPS surprise over the last four quarters is 11.1%.

Model N, Inc. (MODN - Free Report) provides cloud based revenue management solutions for the life science and technology industries. It has a Zacks Rank #2 and its average EPS surprise over the last four quarters is 12%.

Cymabay Therapeutics, Inc. (CBAY - Free Report) is a biopharmaceutical company focusing on developing treatments for metabolic diseases. It has a Zacks Rank #2 and its average EPS surprise over the last four quarters is 11.9%.