One of the most popular methods utilized by active investors is to select breakout stocks. 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.

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.

Checking Whether It’s for Real

Stocks that 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 7889 stocks to only eight.

Here are the top five stocks that meet these criteria:

Alliqua BioMedical, Inc. (ALQA - Free Report) is focused on the development, manufacturing and distribution of proprietary transdermal wound care and drug delivery technologies. Its average EPS surprise over the last four quarters is 3.6%. Alliqua BioMedical carries a Zacks Rank #2 (Buy). 

Endocyte, Inc. (ECYT - Free Report) is engaged in the development of therapies for the treatment of cancer and inflammatory diseases. The stock has a Zacks Rank #2 and its average EPS surprise over the last four quarters is 5.5%.

Navios Maritime Partners L.P. (NMM - Free Report)  is an international owner and operator of dry cargo vessels. The stock has a Zacks Rank #2 and its average EPS surprise over the last four quarters is 133.3%.

Intra-Cellular Therapies, Inc. (ITCI - Free Report) develops drugs for the treatment of neuropsychiatric and neurologic diseases and other disorders of the central nervous system. Intra-Cellular Therapies has a Zacks Rank #2 and its average EPS surprise over the last four quarters is 14.6%

Rigel Pharmaceuticals, Inc. (RIGL - Free Report) is a clinical-stage drug development company that discovers and develops novel, small-molecule drugs for the treatment of inflammatory diseases, cancer and viral diseases. The stock has a Zacks Rank #2 and its average EPS surprise over the last four quarters is 9.3%.