Possibly the single most popular method utilized by active investors is to identify breakout stocks. This method seeks out stocks whose prices are varying within a tight range. In the event of a stock declining below the floor of this channel, it may be time to offload it from your portfolio. But if a stock manages to rise above this channel, it holds the possibility of delivering strong returns.

Picking 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.

Checking 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 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 give you 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 7395 stocks to only 15.

Here are the top five stocks that meet these criteria:

EXFO Inc. (EXFO - Free Report) is a provider of next-generation test and service assurance solutions for wireless and wireline network operators and equipment manufacturers in the global telecommunications industry. EXFO has a Zacks Rank #1 and its average EPS surprise over the last four quarters is 9.4%.

Great Lakes Dredge & Dock Corporation (GLDD - Free Report) is a provider of dredging services in the United States. Great Lakes Dredge & Dock’s average EPS surprise over the last four quarters is more than 100%. Great Lakes Dredge & Dock has a Zacks Rank #1 (Strong Buy).

Clarus Corporation (CLAR - Free Report) engages in design, manufacture, and marketing of outdoor equipment and apparel for climbing, mountaineering, backpacking, skiing, and other outdoor recreation activities. Clarus has a Zacks Rank #2 (Buy) and its average EPS surprise over the last four quarters is more than 100%.

Ur-Energy Inc. (URG - Free Report) is a uranium mining company operating the Lost Creek in-situ recovery uranium facility in south-central Wyoming. Ur-Energy has a Zacks Rank #2 and its average EPS surprise over the last four quarters is more than 100%.

Ladenburg Thalmann Financial Services Inc. (LTS - Free Report) is a provider of investment banking and research services. Ladenburg Thalmann has a Zacks Rank #2 and its average EPS surprise over the last four quarters is 25%.