Buy Points Ahead for Barron's List Leaders

05/07/2012 12:15 pm EST

Focus: STOCKS

Thomas Aspray

, Professional Trader & Analyst

Technical action in the two top stocks on the Barron's 500 list, CF Industries Holdings (CF) and Apple (AAPL), suggests further declines, which should create good buying opportunities.

With technical signals suggesting upcoming corrections in market-leading stocks and good buying opportunities could lie ahead.

Global markets are clearly in “risk-off” mode in reaction to the weekend elections in France and Greece. In Monday trading, Japan’s Nikkei 225 lost 2.78% with similar losses in Hong Kong, where the Hang Seng Index lost 549 points.

Of course, the selling carried over to the European markets, where elections have put the focus back on the fragile status of European debt. The April 13 drop in the German Dax below the March lows warned that the global stock market rally could be in danger. This technical deterioration was shrugged off by our markets, but had me wondering “Will Europe Spoil Apple’s Party?

The European markets have rebounded from the early lows and the following daily chart of the E-mini S&P 500 futures shows that they gapped overnight through the uptrend, line b. The futures had an early low of 1342.50, but 30 minutes before the New York opening were trading much higher at 1357.

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The chart has next support is at the March lows of 1332.75, while the major 38.2% Fibonacci retracement support from the October lows is at 1285. The on-balance volume (OBV) just rallied back to converging resistance (lines c and d) in the past week. This is a negative formation, as the OBV will need to move above this high to turn positive.

The current decline should provide a good opportunity to buy some of the top US companies at lower levels. Last weekend, a Barron’s cover story focused on the Barron's 500, which is the publication’s “Annual salute to companies that have done the best job of growing their businesses.”

The weekly charts of the top two company stocks on the list, CF Industries Holdings (CF) and Apple Inc. (AAPL), both look ready to decline further, but this should present good long-term buying opportunities.

NEXT: Risk-Controlled Entry Points for Both Stocks

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Chart Analysis: CF Industries Holdings (CF) is a $12.5 billion company that tops the Barron’s 500 list. It manufactures and distributes nitrogen and phosphate fertilizer products. Company earnings were impressive last week, as the $6.06 per share topped the $4.95 average estimate. Still, CF was down almost 7% last Friday.

  • The weekly chart shows last week’s reversal with next weekly support in the $175-$178 area
  • There is additional support at $168 with the longer-term chart support and the weekly Starc- band in the $158-$160 area
  • Weekly relative performance, or RS analysis, has not been able to move above last summer’s high, but it is above its weighted moving average (WMA)
  • The RS line has key long-term support at line c
  • Weekly OBV did confirm the recent highs and is now testing its weighted moving average with major support at line d
  • Monthly OBV (not shown) is positive and did confirm the recent highs
  • CF now has initial resistance in the $190-$196 area

Apple Inc. (AAPL) is down just over 12% from the April 10 highs of $644 and had been trading at or above the weekly Starc+ band for five weeks previously.

  • Next support is at the late-April lows of $555 with the 38.2% Fibonacci retracement support from the 2011 lows at $516
  • If this level is broken, then the 50% support stands at $476.80
  • Weekly RS analysis did confirm the recent highs but has been declining for the past four weeks
  • RS line is still above its weighted moving average and well above the long-term uptrend, line f, which signals AAPL is outperforming the S&P 500
  • Weekly OBV shows the major breakout in early 2012 when resistance at line g was overcome
  • Weekly OBV is above its weighted moving average while the daily OBV (not shown) has been below its weighted moving average since April 12

What It Means: There is likely to be further downward pressure on stocks this week, though an oversold rally is likely. As discussed in The Week Ahead, the strength of the rally will be important.

If these two stocks decline to stronger support in the coming weeks, it should present a buying opportunity where risk can be well controlled.

How to Profit: For CF Industries Holdings (CF), go 50% long at $169.82 and 50% long at $163.44 with a stop at $158.48 (risk of approx. 4.9%).

For Apple Inc. (AAPL), go 50% long at $519.28 and 50% long at $508.64 with a stop at $474.30 (risk of approx. 7.7%).

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