Stocks were hit with heavy selling pressure on Monday pushing equity prices to levels last seen 12 years ago. The Dow Jones Industrial Average lost 4.2% to 6,763.29, its lowest close since April 1997. The Dow has now fallen more than 52% since reaching a record high of 14,164.53 in October of 2007.
The market spared almost no name from the onslaught of the bears. However, a few stocks were able to buck to the downtrend and actually close flat to positive, such as 99 Cents Only Stores (NDN), Papa John’s International (PZZA), Hot Topic (HOTT) and Dollar Tree (DLTR).
Any stock that was able to avoid going down on a day when every sector was sold-off, including safe havens like gold, can be looked at as a stock displaying some relative strength. Relative strength is simply a stock’s price change over a period of time relative to that of a market index.
Considering a stock that went up or down for just one day isn’t exactly the greatest measure of relative strength, unless that one day was a major move in the markets and the stock was able to buck the trend and show strength as the market was selling off.
If a stock was able to display some relative strength and trade higher on Monday, or just trade flat and not go down as much as its peers, then it could be signaling that when a rally occurs it will outperform and bounce back harder, since the major market players were unwilling to sell as they dumped everything else they had a position in.
Relative strength isn’t the only thing active investors should be hunting for in a potential bear market rally. Another trading strategy is to focus on stocks that have sold off sharply and have a high short interest. Stocks with these characteristics have the potential to bounce back big to the upside if the market can reverse from the selling pressure and trade up.
With this in mind, let’s take a look at the charts of a few stocks that displayed some relative strength on Monday and that have the potential to bounce back big if the market can rebound.
1. First Solar
One stock with some huge bounce-back potential if the market can rebound is solar module manufacturer First Solar (FSLR). First Solar has dropped a lot from its 52-week high of $317 a share to its current levels of around $107 a share. The stock has found some near term support around $100 a share, following a big volume day to the downside on Feb. 25, where over 14 million shares traded hands versus the average daily volume of only around 4.2 million shares. That size of volume could be indicating that anyone who wanted out of this stock has now sold and moved on. Shares of First Solar are heavily shorted as noted by the short percent of the float at around 11.5% (as of the most recent reporting period for February). If the market comes back, First Solar could bounce big and experience a large short squeeze.
2. Dell
If you are looking for a stock that displayed some relative strength during Monday’s market blood bath, then you need look no further than Dell (DELL). Shares of Dell did not close up on Monday, but the stock was able to buck the downtrend in the Nasdaq and show some resilience after trading in the green for a large portion of the day. The stock was probably helped by a positive mention in Barron’s over the weekend that speculate shares could rebound to $20 a share.
Looking at the chart below you can see that Dell has started to make higher lows following a large volume spike to the upside on Feb. 20 at over 66 million shares versus the average daily volume of 26 million shares. This activity could be marking a bottom in the stock, especially when you combine that with the fact the stock didn’t sell off significantly during Monday’s carnage.
3. J. Crew
The retail sector has been absolutely annihilated of late. The sector is filled with names that are heavily shorted as bears continue to press their best in hopes the American consumer will continue to cut spending during this tough economic environment. One retail stock that could be poised for an extreme bounce back rally is J. Crew Group (JCG). Looking at the chart below, you can see that J. Crew has found some solid support around $8.50 a share. The stock is also starting to display some bullish trends, as indicated by higher lows set in the shares dating back to December 2008. Shares of J. Crew are now trading near the 50-day moving average of $10.96 a share. If the stock can hold these levels, it could be setting up to make a run back to $12.60 a share (or possibly higher).
The fuel that could power a bounce back rally is the unbelievably high short interest in this stock. As of February, over 30% of the float is sold short. Any positive company news or a sharp market rally could send this stock soaring.
4. Aeropostale
One final stock that displayed some positive relative strength on Monday was Aeropostale (ARO). This stock actually managed to trade to the upside on a day when the market was filled with a sea of red. Looking at the chart below, you can see why the stock was strong. Shares of Aeropostale are in a bullish uptrend channel and trading above the 50-day moving average of $20.31. Volume patterns have been very strong since the start of 2009 with some high volume up days occurring frequently. Shares of Aeropostale could pull back to the 50-day moving average and still be in a bullish trend.
Watch for this stock to trade above $24.50 and through the 200-day moving average of $26.40 for signs of more bullish price action in the future. It’s also worth nothing that over 13% of the float is sold short, as of February.
If you want to improve your own technical stock-picking skills, you can share ideas and pick up some tips on Stockpickr’s technical-analysis forum.
Posted on Mar. 3, 2009
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