10 Most Oversold S&P 500 Stocks

07/10/2012 9:50 am EST


Thomas Aspray

, Professional Trader & Analyst

Last Friday’s selling in the stock market was well absorbed, and Monday’s action was pretty normal for a correction within an uptrend. As I reviewed in last Friday’s Week Ahead column, the key indication of the market’s health will be the strength of the next rally.

The Spyder Trust (SPY) closed last week 7.8% above its weekly Starc- band and 4.5% below its weekly Starc+ band. Therefore SPY is neither overbought or oversold.

During corrections, Starc band analysis can help identify stocks that are mathematically in the low-risk buy area or are “oversold.” Regular readers have observed that when prices drop below the weekly Starc- bands for several consecutive weeks the odds of a turnaround are high.

Conversely, stocks that are trading above the weekly and monthly Starc+ bands, like NetFlix (NFLX) last summer, are very vulnerable.

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The table shows that Wellpoint (WLP) is at the top of the most oversold list as of the close on July 5. The stock had been under selling pressure since the middle of June, but did rally Monday after its announced agreement to purchase Amerigroup. It is also important to note that WLP is 24% below its weekly Starc+ band.

Combining the relative performance and on-balance volume (OBV) analysis with the Starc bands can also identify those stocks that are outperforming or underperforming the overall market. Those stocks become more attractive for purchase when they are close to their weekly Starc- bands, as the risk can be better controlled. One of the most oversold stocks does look attractive for new purchases now.

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Chart Analysis: The weekly chart of Wellpoint (WLP) shows that it closed last week just above the year-long support (line a) in the $56.60 area.

  • If this support is broken, there is next good support from 2010 in the $52 to $53 area
  • The relative performance broke down two weeks ago as support (line c) was broken
  • The RS line had formed lower lows since last summer (line b), indicating it was weaker than the S&P 500
  • The weekly OBV continues to make lower highs (line d), and dropped to significant new lows in the past few weeks
  • There is initial resistance now in the $65 area, with further levels around $67.50 to $68

Nike (NKE) was hit hard after it reported earnings just over a week ago. It had reached a high of $114.81 in May but dropped to as low as $85.91 on June 29. This was a drop over 25% from the highs. NKE is still testing its weekly Starc- band.

  • The RS line dropped below its support (line f) and its WMA in early June, when NKE closed above $108. The RS line has turned up, but still looks quite negative
  • The weekly OBV did form a negative divergence at the highs (line g) before dropping below its WMA
  • The OBV is still well above its longer-term support (line h)
  • There is initial resistance at $94, with much stronger levels in the $98 to $100 area

NEXT: A Stock Worth Buying Now


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Southern Company (SO) is a $40.6 billion electric utility that currently yields 4.6%. Just three weeks ago, it traded as high as $48.45, which was very close to its weekly Starc+ band.

  • SO has now retested its breakout level (line a) in the $46 area. The weekly uptrend (line b) is just a bit lower at $45.25
  • The relative performance has turned up from its rising WMA, which is a positive sign. The RS line has key resistance at line c, with long-term support at line d
  • The weekly OBV did not confirm the recent highs, but has turned up from its rising WMA. A breakout in the OBV above the resistance (line e) would be very positive
  • The triangle formation (lines a and b) has upside targets in the $50 area

Autozone (AZO) is a $13.75 billion auto parts store that traded below $100 per share in late 2008. The weekly chart shows that AZO peaked at $399.10 in May, and had a recent low of $353.38.

  • The chart shows a typical A-B-C corrective pattern. as converging support (lines f and g) has been tested
  • The relative performance did confirm the recent highs, but has now dropped back to long-term support (line h). The RS line is still below its WMA, and the daily RS analysis is also negative
  • The weekly OBV did form a negative divergence (line i) at the May highs before dropping below its WMA
  • The selling two weeks ago was quite heavy, and the OBV has dropped back to converging support (lines j and k)
  • There is minor resistance now at $370, with stronger levels in the $380 to $390 area

What it Means: Even though both Wellpoint (WLP) and Nike (NKE) are likely to rally with the overall market, the weekly analysis does not yet suggest that they have bottomed.

Southern Company (SO), according to S&P Capital IQ, has returned over 16% since 1980 if you reinvested the dividends. This is 5% better than the S&P 500 (with dividends). It looks attractive for new purchases now, for the defensive, high-yield part of one’s portfolio.

Autozone (AZO) is such a tremendous long-term growth story that it is likely to be significantly higher in the next year or so. The daily studies do not yet suggest the correction is complete.

How to Profit: For Southern Company (SO), go 50% long at $46.62 and 50% long at $46.12, with a stop at $44.90 (risk of approx. 3.2%).

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