Picking breakout stocks is probably one of the most popular techniques used by active investors. The logic behind this kind of stock selection is to determine stocks that are trading within a narrow channel. Such stocks are to be purchased 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.

Spotting 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, 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 which have just breached this level.

Verifying 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 those 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 7857 stocks to only 7.

Here are the top five stocks that meet these criteria:

Net 1 UEPS Technologies, Inc. (UEPS - Free Report) provides its universal electronic payment system as an alternative payment system for the unbanked and under-banked populations of developing economies. Net 1 UEPS Technologies has a Zacks Rank #1 (Strong Buy) and its average EPS surprise over the last four quarters is 5.3%.

Protagonist Therapeutics, Inc. (PTGX - Free Report) is a clinical-stage biopharmaceutical company with a proprietary technology platform focused on discovering and developing peptide-based new chemical entities to address significant unmet medical needs. Its average EPS surprise over the last four quarters is 13.8%. Protagonist Therapeutics carries a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Tilly's, Inc. (TLYS - Free Report) is a specialty retailer in the action sports industry selling clothing, shoes, and accessories. Tilly's has a Zacks Rank #2 (Buy) and its average EPS surprise over the last four quarters 64.4%.

Nuance Communications, Inc. (NUAN - Free Report) is the leading provider of speech and imaging solutions for businesses and consumers around the world. Nuance Communications has a Zacks Rank #2 and its average EPS surprise over the last four quarters is 11.6%.

Dorian LPG Ltd. (LPG - Free Report) is a liquefied petroleum gas shipping company. Dorian LPG has a Zacks Rank #2 and its average EPS surprise over the last four quarters is 6.2%.