When using charts to search for new stocks to purchase, one of the more popular strategies is to find stocks that are on or near support levels. Support is typically defined as a level where the stock has experienced buying in the past that pushed the stock price higher. It could be a previous low or an uptrend line. Buying a stock on support increases the odds of picking a winning investment.
Investopedia Broker Guides: Enhance your trading with the tools from today's top online brokers.
An overall pullback in the global markets has some stocks breaking through support, as others have been able to stabilize near the important price points. Four such stocks from four very different industries are highlighted below.
SEE: Technical Analysis: Introduction
Potash Corp (NYSE:POT) is forming a double-bottom pattern as it trades near a two-year low it set late last year. The stock closed at $38.58 in December 2011 and has broken below that price this week, only to rally to close above the support price. A 13-day selling streak for POT is what sent the stock lower by over 10% and down to the previous low. Buying POT at support with a tight stop-loss is a high reward-to-risk (r-t-r) setup. The company sells fertilizers and related feed products, and trades with an attractive PEG ratio of 1.09.
Valeant Pharmaceuticals (NYSE:VRX) is a specialty drug company that has products in a variety of niche fields and deals with generic drugs. Based on its estimated earnings of $4.52 in 2012, the stock trades with a P/E ratio of 10.3, which is well below average. The stock hit a multi-month low of $45.52 in February and has recently traded as low as $45.89 before rallying to hold support. The stock has been on a wild ride recently, but it's setting up for a rally off support.
SEE: Support & Resistance Basics
Seagate Technology (Nasdaq:STX) is one of the most eye-popping value plays in the market, with a PEG ratio of 0.10 and a forward P/E ratio of 2.74. The maker of hard drives has been beaten down due to future demand issues and trades at a large discount. Technically, the stock hit a low of $24.87 in early April before rallying to a new all-time high. A recent pullback of 20% has the stock back to the support area and making value investors salivate. A buy in the $25s, with a stop-loss of 8% at the maximum would be an aggressive, yet high r-t-r strategy. As a bonus, the stock pays a 3.8% dividend yield.
Wynn Resorts (Nasdaq:WYNN) has quickly fallen 25% from an early May multi-month high. The operator of casinos complexes has been on a wild ride during the last few years. The most recent pullback has the stock attempting to hold a low $101.02 that was set in December of last year. The stock did break below the century market intraday, but has been able to rally and close above the December low. With a PEG ratio of 1.19 and a dividend yield of 1.9%, the stock is also attractive fundamentally.
SEE: Fundamental Analysis: Introduction
The Bottom Line
Even though successful investors are able to buy stocks that are beaten down and holding support, there is caution that goes along with the strategy. Because the stock has fallen to support, the sentiment is obviously not positive and that could carry stocks right through support levels to big losses. This is why investors must have stop-loss prices ready in the event they are wrong.
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!
At the time of writing, Matthew McCall did not own shares in any of the companies mentioned in this article.