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Breakout Stocks To Watch

Posted: Jun 29, 2009 13:17 PM by Casey Murphy

Tickers in this Article: BAX, AES, BMY, FRX

Support and resistance are undoubtedly two of the most discussed concepts in technical analysis. It is not uncommon to see certain price levels prevent traders from pushing a stock higher. These levels are known as resistance and they tend to act as a ceiling until a stock is able to break them.

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In general, when a stock is able to break above an established level of resistance, this is often followed by a rise in price because it suggests that the downward forces have weakened and that bullish traders are willing to take control of the direction. A common method for identifying levels of resistance comes from drawing a trendline that connects a series of highs. In a trending market, these resistance levels can be identified by a trendline that is drawn at the most recent high. A trendline that is drawn at the nearby swing high is used to bring a trader's attention to a price level that has prevented a move higher in the past. A price move above a swing high is a bullish signal that often triggers a surge in buying pressure. Let's take a look at a few companies that have recently been able to break above influential levels of resistance.

Taking a look at the daily chart of Baxter International (NYSE:BAX), you'll notice that the $52 level (shown by the horizontal trendline) has prevented the price from heading higher since early March. As you can see from the chart, a break above a level of resistance, like the one shown on Thursday, can often signal an opportune moment for bullish traders to take a position. The short-term level of resistance has caused the price to move lower for most of of the year, but the recent close above this level suggests that the story is changing. The break above the trendline combined with the recent broad market strength that has dominated over the past couple of trading days suggests that the short-term direction could remain upward. Many traders will likely protect their positions by placing a stop loss order below the nearby trendline ($52)

Bristol-Myers Squibb Co. (NYSE:BMY) is another company that has recently been able to break above its nearby swing high. As you can see from the chart below, the $20.75 mark acted as a short-term level of resistance, but the recent close above this mark suggests that the price may be getting ready to make a move higher. Short-term traders will likely watch for the stock to make a move toward the next level of resistance, which is currently near the 161.8% Fibonacci extension line (dotted line near $22).

Bullish traders have been trying to send the price of Forest Laboratories (NYSE:FRX) beyond an influential level of short-term resistance. As you can see from the chart below, the bulls have been struggling to send the price above the nearby swing high and many traders are curious to see if the stock will be able to make a sustained break higher. This stock will likely remain on many short-term traders' radar because a close above the nearby trendline could trigger the start of another wave upward. Another company that has recently broken above an influential resistance level is the AES Corporation. ( NYSE:AES). It wouldn't be surprising to see traders also add these stocks to their watch lists; they could also profit from recent breakouts if the broad market strength continues.

(For more on support and resistance, see Support And Resistance Basics and Support And Resistance Reversals.)

By Casey Murphy

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Casey Murphy is the senior analyst at Investopedia.com and is a graduate of the University of Alberta School of Business. He specializes in technical analysis and is dedicated to uncovering profitable trading opportunities. Click here to join Casey in Investopedia's free stock picking community.

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