Traders: Current Tape Under Pressure; Watch These 3 Companies

By Quint Tatro  MAY 24, 2011 1:00 PM

Focus on monster breaks that could lead to outsized gains if the market's health perks up anytime soon. Here, three names to consider.

 


As the major averages fight for footing, it feels as if we are on the brink of a substantial sell-off. While the summer of 2010 malaise turned some heads, we have yet to return to the scene of the 2007-08 crime and watch the proverbial other shoe fall. Whether the current tape is the one that catches many off guard or not remains to be seen, but I continue to prepare for the next leg higher.

To that end, I have started some small positions based on weekly chart reads. With leashes out near Pluto, I want to give these names plenty of breathing space while keeping my risk per trade in check. I will ignore the daily gyrations and focus on monster breaks that should lead to outsized gains if the market’s health perks up anytime soon. Here are three names I am currently holding.


Click to enlarge


Rex Energy Corporation (REXX) is an O&G play that finally had its net income for the fiscal year ending December 2010 back in the black. Now in its 18th month of a basing pattern, REXX looks poised to have shareholders profit. With a stop almost 25% below current prices (at $10.00), I am willing to let REXX meander sideways in anticipation of much larger gains on a break. The key for me will be the patience to hold REXX as it continues its sideways consolidation.

I am long at $12.65, and like that that the 50-week moving average is now turning ever so slightly up and could be the basis of some longer term support. Once REXX breaks above recent highs at $14.33, there is no reason that it cannot challenge 2008 highs which topped out near $30.00 per share. Clearly such a move will not happen overnight, so I will tuck away some shares and revisit REXX on a weekly basis to monitor its progress.


Click to enlarge


Lithia Motors (LAD) is a network of auto dealerships franchises based in the US that sells both new and used autos as well maintenance on those vehicles. The 2007-08 crash was not kind to LAD, as it found its price decimated from $31.00 to $1.53 in less than a two-year time period. Since then, it has done a phenomenal job of repairing the damage, but not without some wide price swings in the interim.

Off its April 2009 lows, LAD raced ahead in almost parabolic fashion for five months giving the nimble trader and amazing return in such a short time. Just as swiftly however, LAD once again turned tail and lost 60% of its value in the next year. LAD is now back challenging those 2009 highs, and has two distinct levels of support playing in its favor at this juncture. Note on the chart that a lateral trendline tracing all the way back to January 2008 is coming into play at these levels. Additionally, albeit a bit steep, support can be drawn from the April 2009 lows converging at current levels as well.

I have taken a full position in LAD with a cost basis in the $17.40 range and a stop at $15.00. While I will give LAD some room to oscillate, the stop is in place to prevent participation in the downdraft similar to the last two. By calculating acceptable risk and adhering to the pre determined stop, in my opinion LAD offers a great risk reward at these levels. Now we just need to get a little bit of help from the sagging averages so they do not drag down even the best of breed names.


Click to enlarge


A third longer-term pattern that caught my eye is the one that has been fomenting in JDS Uniphase (JDSU). Yes, this tech bubble darling is still alive and kicking. While JDSU’s price is nowhere near its Internet bubble days, it has indeed made an attractive chart the last four and a half years. The challenge at times can be finding a proper entry in a name once it starts out of the gate like a racehorse.

In late 2010, JDSU offered such a buy point as it bounced off of support at the 50-week multiple times and then raced to multi-year highs. In February of this year JDSU also had a daily gap higher that has since been filled. But the key technical feature that interests me is that JDSU has held above that $18.00 level ever since the breakout. My entry is a bit higher than current levels, but I have a stop below April 2010 lows at $17.80. If JDSU gives back this inflection low, I will lick my wounds and move on.

With the current tape under some serious pressure, it will more difficult for these weekly patterns to break to new highs. I have given them long enough leashes to compensate for a mild correction, reducing share count to keep risk per trade in line with my trading style. If my favorite weekly charts start to erode and stop me out, that will be a major signal to me that downside pressure has yet to relent and I will be moved back to cash. Until that time, I am banking on these names the weather the current storm in flying colors.

No positions in stocks mentioned.