Selecting breakout stocks is probably one of the most favored techniques among active investors. The idea behind this kind of stock selection is to determine which stocks are trading within a narrow channel. These stocks are to be bought 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.

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.

Determining 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 7905 stocks to only 11.

Here are the top five stocks that meet these criteria:

PRGX Global, Inc. (PRGX - Free Report) provides audit, analytics, and advisory services in order to improve client financial performance. PRGX Global’s average EPS surprise over the last four quarters is 17.9%. PRGX Global carries a Zacks Rank #1. 

Escalade, Incorporated (ESCA - Free Report) is a diversified company engaged in the manufacture and sale of sporting goods products and office and graphic arts products. Escalade has a Zacks Rank #2 (Buy) and its average EPS surprise over the last four quarters is 14.1%.

Spartan Motors, Inc. (SPAR - Free Report) is a leading designer, engineer, and manufacturer of custom heavy-duty and specialty vehicles. Spartan Motors has a Zacks Rank #2 and its average EPS surprise over the last four quarters is 6.6%.

Trecora Resources (TREC - Free Report) owns and operates a petrochemical facility located in southeast Texas. Trecora has a Zacks Rank #2 and its average EPS surprise over the last four quarters is 6.6%.

TechTarget, Inc. (TTGT - Free Report), a leading online Information Technology media company, provides IT companies with ROI-focused marketing programs to generate leads, shorten sales cycles, and grow revenues. TechTarget has a Zacks Rank #2 and its average EPS surprise over the last four quarters is 13.8%.