TM editors' note: This article discusses a penny stock and/or microcap. Such stocks are easily manipulated; do your own careful due diligence.

Possibly one of the most preferred methods for those using an active investing approach, selecting breakout stocks promises substantial returns. This approach involves identifying those stocks whose prices are varying within a narrow band. If the price of the stock falls below this channel, it could be the best time to sell off this stock. However, the best time to buy a stock as per this strategy is when it is about to break above this trading band. Such stocks offer the prospect of impressive gains.

Identifying Breakout Levels

The key to this strategy is calculating the support and resistance levels of a stock. The floor 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 resistance 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.

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 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 7906 stocks to only six. Each of these stocks has a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Here are the top four stocks that meet these criteria:

Mateon Therapeutics, Inc. (MATN - Free Report) is a biopharmaceutical company focusing on the development of vascular disrupting agents for the treatment of cancer. Mateon’s expected earnings growth for the current year is 17.7%.

Emerge Energy Services LP (EMES - Free Report) is engaged in owning, operation, acquisition and development of energy service assets primarily in the U.S. Its expected earnings growth for the current year is 94.5%.

Cobalt International Energy, Inc. (CIE - Free Report) through its subsidiary Cobalt International Energy, L.P., operates as an independent oil-focused, exploration and production company. The stock’s expected earnings growth for the current year is 78.1%.

Inpixon (INPX - Free Report) provides indoor positioning and data analytics services and solutions. Inpixon’s expected earnings growth for the current year is 83.4%.