I have outlined why fundamentals look best at market highs, and worst at market lows. Just like we n...
4 Stocks Destroying Their 50-Day Lines
05/24/2012 12:15 pm EST
MoneyShow.com’s Kate Stalter ran a screen to show liquid stocks showing short-term moving average strength after Monday’s rally. Here are four names she likes right now.
Following Monday’s market rally, I ran a scan of stocks holding at least 10% above their 50-day moving averages. I limited my selections to those with a recent history of earnings increases. I also added a liquidity factor, screening for stocks trading at least 300,000 shares per day, on average.
Even in the market correction of the past few weeks, a number of stocks were able to find support around that medium-term price line…but I wanted to set the bar even higher, with the goal of identifying some of the better price performers.
One that jumped out is online travel company Expedia (EXPE), which gapped up 23.5% on April 27, after better-than-expected first-quarter results, led by strong hotel bookings.
The stock held most of gains over the past three weeks of general market declines, though it retreated from its April 28 all-time high of $43.92. Shares closed Monday at $42.35.
Expedia is the leading price performer in the online travel category at the moment, while fellow S&P 500 component Priceline.com (PCLN) languishes beneath its 50-day line. Expedia is hovering about 19% above its 50-day as of Monday’s close, and about 2% above the short-term ten-day average.
Despite the strong market move Monday, it would be premature to call a confirmed uptrend, since it is the first day the major indices have attempted to rally off their lows from Friday’s session. So to put Expedia’s technical in context of the wider market: In a bull market, I would consider this stock to be buyable, because it’s perched above its ten-day line, and below its prior high.
However, in a market that has not confirmed a fresh rally, it’s still risky to be making new buys. As always, traders and investors who decide to enter any stock in a downward-trending market should be prepared to cut losses quickly if the stock falls a specified percentage…no more than 10%…below its purchase price.
A couple of smaller names also popped up on my scan of stocks holding above their 50-day lines. Liquidity Services (LQDT), which runs business-to-business online auctions of surplus and salvage goods, had pulled all the way back to its 50-day line in last week’s market retreat. It found support there, and closed the week at $58.54, just below its 20-day average.
Potential buy points could vary. If the stock reclaims its ten-day line and the major indices have confirmed a new uptrend, that could offer a buy point. When it clears resistance above its prior high of $66.47, that could provide another entry opportunity.
A mid-cap that met my higher-than-50-day criteria was Israel-based telecom and storage chip designer Mellanox (MLNX). Like Expedia, this stock bolted higher after a quarterly report that topped analysts’ expectations.
It gapped up an incredible 52% on April 19, then gradually pulled back. It’s not uncommon for a stock to consolidate after a new high, but the stock did not close the gap. It closed Monday at $58.53, 13% off its April 19 high.
With Monday’s price action, Mellanox regained its ten-day line. That’s a bullish signal…especially in an uptrending market. My risk-management system would keep me out of this stock until a new rally is confirmed on at least one of the major indices.
Mellanox is among some other semiconductor names that are showing good technical strength. Audio chip maker Cirrus Logic (CRUS), a supplier to Apple (AAPL), also closed above its 50-day line on Monday.
Here, too, is an example of a stock that gapped up on earnings, and has been consolidating since then. Not only was the market in decline…but so was Apple.
The ten-week support for Cirrus Logic is a good indicator, that investors are stepping in to bolster an existing position. Some institutional investors prefer to buy on the dips, as they view fundamental valuations as more attractive.
There’s a technical signal to watch for when it comes to Cirrus Logic: The stock’s 20-day line has been turning higher while its ten-day has headed south. At Monday’s close, both were in the same spot: $25.87. Cirrus Logic closed at $26.06.
If the price continues rising after Monday’s 4.4% gain, watch for the stock to continue trading above that ten-day level. Here again, in a bull market, this could be a buy signal. But as of Monday’s close, the market conditions remain too risky.
At the time of publication, Kate Stalter did not own positions in any of the stocks mentioned in this column.
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