From Stalking to Buying

Posted by downtowntrader | 7/22/2010 10:53:00 PM View Comments

I mentioned last week how I had been stalking a couple of stocks on the long side despite the market outlook looking bleak. I've always maintained that its good to be prepared for any move, and thus I wanted to have a few stocks that were showing relative strength just in case the markets surprised with a rally. While the markets are certainly not out of the woods, the S&P500 was able to close above its 50-day moving average and the bulls have strung together a solid 2 out of 3 days.

Finisar Corporation (Public, NASDAQ:FNSR) was one of the stocks I highlighted and I started a position in it today. While the stock is still under resistance, I felt comfortable with the recent price action and the risk versus reward from this level. FNSR looks like it has begun to emerge from the triangle base it has been forming and could easily gain some traction if the markets continue to rally. I'm keeping the risk pretty tight because the play is either for FNSR to break out immediately from here, or for further consolidation. FNSR needs to clear $16.50-16.60 first, and if it does, it will likely head to new highs.
While the other stock (RDY) I was stalking didn't work out, I did find another stock that had a very similar chart to FNSR. Network Engines, Inc. (Public, NASDAQ:NENG) is also trading in a triangle and could be ready to emerge from its base. This is another case where a tight stop can be employed because NENG will either breakout and likely at least retest its prior highs, or head back down for further consolidation. While I'm not convinced it will follow through, the thought process is that if NENG can clear the $3.05 area it could end up making new highs for the year.
Like I mentioned before, there are no guarantees the markets are headed higher from here. In fact, there is the very real possibility that the markets could head much lower. Despite that, these stocks are showing enough strength for me to take a shot on and if the markets can follow through on this rally attempt, these stocks should end up setting new highs. As always, please complete your own due diligence and manage your risk, especially in this environment.

Good Trading,


TheStockBandit University

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