These stocks are strong performers, but a key technical measure indicates risk may be high for new buying. Keep watching them closely and look to buy at lower levels.

The rally from last week’s lows has been fairly impressive, as many stocks and ETFs show gains of over 10% in just a few days. Typically, sharp gains like this are more characteristic of a rally against the major trend.

Stocks are higher in early-Monday trading on new plans to support the Eurozone banks. A strong close Monday with strong A/D numbers could complete the bottom formations in the Advance/Decline (A/D) lines that we have been watching. This would put the market in a position to rally into the end of the year.

If last week’s lows in the stock market do hold, then those stocks and industry groups that are acting stronger than the market should be favored. This makes the relative performance, or RS analysis, especially important.

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The entry point plays a key role in whether any trade or investment will turn out profitably. The table above shows the ten stocks in the S&P 500 that are the closest to their weekly Starc+ bands.

Often times a stock will close at or above the weekly Starc+ band for a week or two before they complete a short-term top. Clearly, buying a stock at a level that is close to its weekly Starc+ band has a higher risk and generally requires a wider stop.

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Chart Analysis: International Business Machines (IBM) closed last Friday just $4 below the weekly Starc+ band at $186.40. On the weekly chart, you can see that IBM closed above the weekly Starc+ band in July and below the Starc- band in August.

  • Once above the all-time highs at $185.63, there are further targets at $195-$200
  • The RS analysis broke out in May and made new highs again last week. Therefore, IBM should continue to outperform the S&P 500
  • The weekly on-balance volume (OBV) did confirm the recent highs and has just closed back above its weighted moving average (WMA)
  • The daily OBV (not shown) is clearly positive and is acting strong
  • There is initial support at $176-$178 with more important support in the $165-$168 area

Reynolds American (RAI) closed strong last week and well above the July/August highs. The all-time highs from June at $39.87 are now being challenged. The weekly Starc+ band is at $40.93.

  • The RS line has surged to the upside over the past month and is acting stronger than prices
  • The weekly OBV is positive and confirmed the highs from early in the year. Volume increased last week
  • The daily OBV (not shown) has been positive since the latter part of August. It is acting very strong, though the daily Starc+ bands are also being tested
  • There is initial support now at $38.60 with more important support in the $36-$37 area
  • There is major support for RAI just below $31, line c

NEXT: 2 More Stocks with Strong RS Analysis

Tickers Mentioned: Tickers: IBM, RAI, CPB, KMB