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5 Stocks Headed Higher in a Weak Market - 34880 views
WINDERMERE, Fla. (Stockpickr) -- The path of least resistance in the U.S. equities market continues to be higher, despite the big weak action we’re seeing in stocks today.
I have witnessed too many traders trying to pick the top in the markets over the past few weeks in hopes that the rally will come to an end. Many think that “ Sell in May and go away” is going to play out. Sure, it could work out that way, but so far, unless you shorted at the 52-week highs, which aren’t far from where we are currently trading, you haven’t made any money. The dip-buyers have continued to return to the market and could do so again.
As a trend follower, I am going to give the market the benefit of the doubt until I see clear signs that the uptrend wants to end. One or two days of weakness does not equal an end to the uptrend in the markets. Remember, all major U.S. averages are trading very close to their 52-week highs. Why try to pick a top when you’ll be better-served waiting for confirmation that the market wants to trade significantly lower.
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What will that confirmation look like? One thing to look for is big drops in leading stocks on heavy volume even when market is trending up. We haven’t really seen too much of that yet. Another sign is to watch for the market to gap up in early trading and then selloff late in the day. Look for the market to close below the daily lows on increasing volume for any session you see this type of action. To date, we haven’t seen any trading days display this pattern.
That said, if you see early weakness like we’re seeing today, and then you see the market trade higher into the close, take that as a bullish sign. The market loves to suck in the short-sellers with early market weakness and then flush them out with buy programs that overwhelm the bears. Also, if you see the market flush down big like today and close on the lows, consider that to be bearish action.
I would like to stress to all traders to keep an eye on how the U.S. dollar behaves. Today the dollar is spiking higher by around 44 cents to just above $75, and here we have a market selloff. If the dollar starts to make much bigger spikes higher, then stocks will most likely come under pressure. That’s a big “if,” though, so continue to monitor the dollar action.
Despite the notable drop in the markets today, there are still plenty of stocks that are acting strong and looked poised to trade higher.
One stock that loves to trend higher whenever the market pulls back is Netflix (NFLX), an Internet subscription service streaming television shows and movies, and one of TheStreet Rating's top-rated Internet catalog and retail stocks. This stock is off to a great start in 2011, with shares up around 36%. The shorts love to play this stock -- for what reason I don’t know. It’s been nothing but a strong-acting stock for some time now.
If you take a look at the chart for Netflix, you’ll the stock has put in a short-term triple bottom pattern at around $228 to $225 a share. This bottom is also coming in at around the 50-day moving average at $227.75 a share. Traders should now watch for Netflix to take out some near-term overhead resistance at around $240 to $240.45 a share. If you see that level taken out on strong volume, then look for much higher prices in Netflix the coming days or weeks.
The three-month average trading volume on Netflix is 5.7 million shares. If we see Netflix close above $240.45 on volume that’s well above 5.7 million shares, then it’s very possible that this stock will trend higher and continue to cause the shorts pain. A move above $240.45 should put the all-time high on Netflix of $255 in focus in the short-term. Avoid this trade if we don’t get that volume move above $240.45 on a closing basis.
Recently on "Mad Money," Jim Cramer referred to Netflix as one of his top cheap growth picks.
Another stock that’s acting strong today is Cree (CREE), which develops and manufactures light emitting diode products, silicon carbide and gallium nitride material products, and power and radio frequency products. So far in 2011 this stock has been hit hard by the bears, with shares off by around 38%. However, that weak action might be about to change quickly.
If you take a look at the chart for Cree, you’ll see that the stock has formed a double-bottom chart pattern at around $39 to $38.53 a share. The stock has already started to bounce off of those levels today and is now trading around $40 a share.
Traders show now watch for Cree to break out above a key descending trend line at around $40 on a closing basis on strong volume. Look for volume to that comes in on the upside that’s well above the three-month average volume of 3.6 million shares. If we get that type of action, look for this stock to make a run at its next significant overhead resistance level of $46.50 a share.
I love trades like we have setting up here with Cree because your stop is very easy to define. You can either use that descending trend line as your stop, or use the double bottom price as your stop. If Cree breaks out above the descending trend line and then trades back below it on a closing basis, get out of the trade. If you use the double bottom price as your stop, get out of it closes below those levels.
I recently highlighted Cree as one of six heavily shorted stocks that could explode.
Bank of America
If you’re looking for a hated stock that is showing some small signs of strength today, then take a look at bank and financial holding company Bank of America (BAC), which shows up on a recent list of 10 Stocks Analysts Are Bullish About. This stock has pretty much done nothing all year, with shares off by around 7.6%.
If you take a look at the chart for Bank of America, you’ll see that this hated bank stock has put in a double-bottom chart pattern at around $12.15 to $12.11 a share. The stock has already started to bounce off that level with shares trading at around $12.30 today. What traders should watch for now is for Bank of America to move above a key descending trend line at around $12.45 a share on big volume. I would want to see volume that’s well above the three-month average activity of 133.5 million shares on any close above that descending trend line.
Once again, you have an easy stop here for a long trade into Bank of America. You can either use a close below the descending trend line as your stop, or you can use the double bottom levels as your stop.
I would easily see the market rotate into the banks here because they’re so hated if the market pulls back. Nobody will be expecting it and the shorts could easily be caught off guard. If Bank of America wants to make a run higher here, I would be a buyer on any weakness and add to my position if it moves above $12.70 (next resistance level) and add above the 50-day and 200-day moving averages.
Keep in mind that it’s always a sign of strength if a hated stock isn’t moving lower when the entire market is down notably. Shares of Bank of America might have put in a short-term bottom here, so keep this name on your radar.
Level 3 Communications
One stock that’s not just acting strong today but is also breaking out is Level 3 Communications (LVLT). This stock is off to a blazing start in 2011, with shares already up over 90%.
If you take a look at the chart for Level 3, you’ll see that this red-hot stock has just started to break out above some past overhead resistance at around $1.84 a share on monster volume. Volume today has clocked in at over 74 million shares, which is more than twice the three-month average volume of 31 million shares. That’s monster breakout volume for any stock. Volume on Tuesday was 122 million shares as the stock also traded up on the day. That just confirms the strength in the stock and shows that large institutional players are continuing to buy this stock in the face of overall market weakness.
This is very bullish price action and volume on Level 3. I love that the volume is accompanying a major breakout above $1.84. If Level 3 can hold this breakout on a closing basis, then the stock really doesn’t have anymore overhead resistance until $3.44 a share. That leaves a lot of room for upside here, so I would look to add this name on any weakness. You could simply stop out of the trade at let’s say 10 cents below the breakout level of $1.84.
One more stock that’s acting very strong today is Riverbed Technology (RVBD), a developer of solutions to the fundamental problems associated with information technology performance across wide area networks. This stock has traded pretty much flat so far in 2011, with shares only up around 1.3%.
If you take a look at the chart for Riverbed Technology, you’ll see that the stock has been making higher lows since mid-April which is bullish price action. This shows that large traders are eager to buy the dips at higher prices whenever Riverbed has sold off.
Now Riverbed is starting to trade above some past overhead resistance levels at around $36.35 a share. The volume so far today is already coming in at 4.4 million shares, and the average three-month volume is 4.8 million shares.
What I would do here with Riverbed is look for the stock to close above $36.35 on volume that’s well above 4.8 million shares. I would also consider it bullish if the stock can close above its 50-day moving average of $36.57 on strong volume in the coming days or weeks.
The way you could trade Riverbed, one of TheStreet Ratings' top-rated communications equipment stocks, is to a buyer on any weakness as long as the stock continues to hold its pattern of higher lows. I would then add to the position once it takes out the 50-day and then add heavily if it trades above the next significant resistance level at $38.66 a share.
To see more stocks that are acting strong today, check out the Stocks Acting Strong & Poised to Go Higher portfolio on Stockpickr.
At the time of publication, author had no positions in stocks mentioned.
Roberto Pedone, based out of Windermere, Fla., is an independent trader who focuses on stocks, options, futures, commodities and currencies. He is also an outside contributor to Beconequity.com and maintains the website Maddmoney.net, which he sold to Blue Wave Advisors in 2008. Roberto studied International Business at The Milwaukee School of Engineering, and he spent a year overseas studying business in Lubeck, Germany.