Focus on Strength

Posted by downtowntrader | 8/25/2010 11:36:00 PM View Comments

I am going to preface this article by stating I don't think the markets are healthy right now. While I remain unconvinced that the markets are headed appreciably lower, I do think at best it will still take some time to absorb the recent distribution. Worst case, is that this is only the beginning of a larger decline but it is still much too early to make any assumptions. With that in mind I wanted to show some examples of charts I think are worth following even in this environment.

I think traders too often get caught up in chasing stocks that are on "sale" or so called "values". While this may work for fundamental investors with long time frames, the odds are that if you are reading this you are trading on much shorter time frames and on technicals. More often, it pays to stick with stocks that are showing relative strength and remain with healthy charts. This is even more important during times of market uncertainty. When the markets are rolling, even bad stocks will tend to get supported by rising with the tide. However, in tough times traders should be much more picky about what they trade and stocks that are beaten up are like that for a reason. Simply put, someone is selling.

While focusing on stronger stocks doesn't give traders a fool proof trade, at least you are not trading against the trend. Acme Packet, Inc. (Public, NASDAQ:APKT) is an example of a stock that has weathered the recent storm very well. While APKT suffered through a sharp gap down in late July, it has recovered fairly quickly. APKT is now consolidating in a tight range just underneath resistance. Traders should be aware that this resistance level is fairly strong and APKT has already failed at this level a few times. However, if APKT can clear this area it would take it to new all time highs and a probably cause a short squeeze.

Yum! Brands, Inc. (Public, NYSE:YUM) is another stock that has held up well along with other fast food stocks like McDonald's Corporation (Public, NYSE:MCD) and Chipotle Mexican Grill, Inc. (Public, NYSE:CMG). I'm not sure why fast food stocks have held up so well, but its always better for a stock when the entire sector is trading in unison. This action reveals institutional support as large funds often trade in baskets to diversify their exposure to any given sector. It is important to note that YUM hasn't cleared anything yet, so traders are better served watching this patiently. It's highly likely that even if YUM broke the descending trend line shown on the chart, it would probably trade back to that level a few days to weeks later to retest the area as support. However it is definitely worth watching as a strong relative performer in a good sector.

Good Trading,


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