As August approaches, a relatively weak month for the stock market, investors should take a more active approach to stock selection, identifying potential breakout opportunities within defined trading ranges.
Going by this approach, a stock should be sold if it falls below the lower band, as this may signal further downside. Conversely, a move above the upper band indicates strengthening momentum, a potential breakout, and an opportunity to capture further gains.
Using this framework, Bassett Furniture Industries, Incorporated BSET, Aveanna Healthcare Holdings Inc. AVAH and Integra LifeSciences Holdings Corporation IART stand out as potential breakout stocks ahead of August.
To pick a breakout stock, calculate support and resistance levels. A support level is the lower bound for stock movements, while a resistance level refers to the maximum price it trades at within a considerable period.
In other words, the demand for a stock is lowest at its support level, meaning most traders are willing to sell it. The majority of traders are willing to go long on the stock at the resistance level, indicating that they would like to add it to their portfolios. The key to identifying breakout stocks is to zero in on those on the verge of a breakout or those that have just broken above resistance.
The primary risk associated with such a strategy is that the decision to buy an apparent breakout candidate has been incorrectly timed. When a stock moves above the resistance level, it should be a highly prized commodity for traders. However, whether such a breakout is genuine is another matter altogether.
For a bona fide breakout, the stock’s earlier resistance barrier should become its new support level. This only happens if the established trading channel is tested by observing long-term price trends. The strength of the support and resistance levels can be ascertained only through such a study. Despite the risk of misidentification, correctly identifying such stocks can yield considerable returns, even at a price that may not seem attractive at first glance.
• Percentage price change over four weeks between 10% and 20% (Stocks showing considerable price increases but whose gains are not excessive)
• Current Price /52-Week High greater than or equal to 0.9 (Stocks 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.)
Regardless of market strength, stocks with a Zacks Rank of #1 (Strong Buy) or 2 (Buy) have a proven track record of outperforming the market. You can see the complete list of today’s Zacks #1 Rank stocks here.
• Beta for 60 months less than or equal to 2
(Stocks that move more than the broader market but within a reasonable limit.)
• Current price less than or equal to $20 (Stocks reasonably priced)
These criteria narrow the universe of more than 6,853 stocks to only 11.
Here are the top three stocks:
Bassett Furniture Industries designs, manufactures, distributes and retails home furnishings across the United States. Bassett Furniture Industries has a Zacks Rank #1. BSET’s expected earnings growth rate for the current year is 18.7%.
Aveanna Healthcare provides pediatric and adult home healthcare services across the United States. Aveanna Healthcare has a Zacks Rank #2. AVAH’s expected earnings growth rate for the current year is 21.7%.
Integra LifeSciences develops and markets surgical instruments and specialty medical products for neurosurgery, ENT and wound care. Integra LifeSciences has a Zacks Rank #2. IART’s expected earnings growth rate for the current year is 9.9%.
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Originally published on zacks.com, part of the BLOX Digital Content Exchange.
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