Four of the Most Overbought Nasdaq 100 Stocks

By  AUG 26, 2013 3:17 PM

Many investors have been expecting the tech sector to play a role in leading the market higher, and so far, it hasn't disappointed.


A mixed close last week with the S&P 500 (INDEXSP:.INX), Nasdaq 100 (INDEXNASDAQ:NDX), and Russell 2000 (INDEXRUSSELL:RUT) higher while the Dow (INDEXDJX:.DJI) closed lower despite the sharp gains in Microsoft Inc. (NASDAQ:MSFT). The action in both Asia and Europe seems to be following the same script with Hong Kong’s Hang Seng (INDEXHANGSENG:HSI) higher but Japan’s Nikkei (INDEXNIKKEI:NI225) a bit lower. Stocks in the eurozone are also mixed and the futures are flat.

There is a full slate of economic data this week both in the US and also overseas. Both the US and India will release their latest GDP data, along with key economic data released from China and Japan.

The PowerShares QQQ Trust (NASDAQ:QQQ) has been leading the SPDR S&P 500 ETF Trust (NYSEARCA:SPY) since the late June lows as it is up 10.8% versus a 7% gain in the SPY. The daily and weekly relative performance analysis indicates that the QQQ is now a market-leading sector.

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Because of this outperformance, I wanted to focus on the Nasdaq 100 for the weekly starc band scan, which gives a reading of whether a stock is a high-risk or low-risk buy at current levels. If a stock closes above its upper starc band (starc+), it implies a higher risk since the stock is more likely to at least move sideways, if not pull back over the near term.

Of course, it can also be one way to identify those stocks that are emerging new market leaders. In this week’s table, Facebook Inc. (NASDAQ:FB) leads the list as it closed 0.5% above its weekly starc+ band. This is in contrast to the PowerShares QQQ Trust, which is still 4% below its starc+ band.

From the top 15 stocks on the table, I have chosen four stocks, one of which looks attractive for new purchase near current levels while another is an earlier recommendation.

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Chart Analysis: Facebook traded in a very tight range from June till the end of July when it soared in reaction to much better-than-expected earnings.
Ross Stores, Inc. (NASDAQ:ROST) is a $14.04 billion discount retail apparel company that hit a new 42-week high last week on strong earnings with rising sales at all of its stores. It closed last week 3.8% below its weekly starc+ band.

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Qualcomm (NASDAQ:QCOM) shows a broad trading range with resistance, line a, at $68.83 that goes back to the 2012 highs.
Automatic Data Processing (NASDAQ:ADP) has been moving sideways for the past four weeks with initial resistance at $73-$73.83 and the starc+ band at $76.37.
What It Means: The most overbought stock, Facebook looks very positive over the intermediate term but needs a significant pullback to create a reasonable risk entry.

Ross Stores enters a strong seasonal period in September and looks attractive on a pullback into last week’s range.

Qualcomm has a very strong fundamental case as a leading maker of chips for mobile devices. Technically, it looks as though it will pull back towards its recent lows, which could present a good buying opportunity.

Support for Automatic Data Processing is now at the four-week lows, which if broken, will signal a shaper correction.

How to Profit: For Ross Stores, go 50% long at $68.08 and 50% at $67.43, with a stop at $64.23. (risk of approximately 5.2%).

Portfolio Update: Should be 50% long Automatic Data Processing at $55.54, with a stop at $68.82.

Editor's Note: This article was written by Tom Aspray of MoneyShow.

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No positions in stocks mentioned.

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