Buy strength and sell weakness is how many short to medium-term traders attempt to profit from the market. Investors on the other hand are often looking to pick a stock up on the cheap.
"Cheap" is a relative and subjective term, of course. These four stocks have been beaten down, and may look cheap compared to last year's prices, but expensive compared to prices a year to two ago. While no analysis will be perfect, looking at the long-term technical picture could shed some light on if these stocks will continue to move lower, offering a better opportunity to buy in the future with less downside risk, or if now is a decent time to buy.
When Whole Foods Market, Inc. (WFM) broke below $50 it completed a head and shoulders pattern which indicated a drop to $35. That target has nearly been reached with a July low at $36.08. While that is target for the head and shoulders, it doesn't mean the price will stop falling there. The weekly chart shows a strong uptrend from 2009 to 2013, but a strong downward transition in 2014. Common retracement levels of an uptrend include 50% and 61.8% (a Fibonacci level). The price is currently near the 50% level ($34.50) which may offer some support; the price has already stabilized just above $36. Buying here presents a very nice reward to risk if the price trends higher, with a stop loss below $34 and the expectation the price will rebound to at least $49+. (For related reading, see: Retracement or Reversal: Know The Difference.)
If the downtrend continues, though, the next potential support is near 2011 support and the 61.8% Fibonacci retracement at $27. A similar trade can be entered here, as described above. For either potential support level, another option is to wait for the price to make a higher swing low and higher swing high (not necessarily in that order) before considering a long position. A stop can go below the last major low. This shows some buyers are entering the stock again.
Coach, Inc. (COH) broke a major head and shoulders pattern at $45.80. The target for that pattern is $12.80, not far from the 2009 low at $11.41. This stock has already retraced more than 61.8% of the 2009 to 2012 rally, and is now in a 2010 support area near $34. Given the strong selling since May and the overall downtrend there is a strong possibility the price will keep falling. In the short-term the price has found support above $33. It will take a bounce above $41, and a pullback following it which stays above $34 to indicate enough strength to take a trade near these levels. A stop could then be placed below $33 with the expectation that the price will rally to $48+. If the price continues to fall through $33, leave it alone. Wait for a higher swing high and higher swing low to form before considering taking a long. (For related reading, see: Support and Resistance Reversals.)
Avon Products, Inc. (AVP) shows a long-term downtrend on the weekly chart going back to 2004. A strong rally in 2009 has been followed by weaker rallies and continual sharp sell-offs. The July sell-off has pushed the price to lows not seen since 2000. Bleak fundamentals including-- declining revenue, negative earnings and profit margins — as well as a continually sliding price make this a hard one to justify buying. For those who believe the company can turn it around, $11.66 is the 1999 low which kickstarted a four-and-a-half year rally. If the price can stabilize around there — higher swing high and higher swing low (again, not necessarily in that order) — then picking up a small position with a stop below $11 does offer a high reward potential for a small amount risk if the price finds support in that region again. (For related reading, see: The Five Biggest Stock Market Myths.)
Mattel, Inc. (MAT) failed to reach and hold a new high in late 2013 signaling potential weakness as the price made a double top and fell aggressively to start 2014. Mid-July has experienced strong selling again, pushing the price back down to short-term support at $35. A drop much below $35 breaks an approximate $5 range the price has been trading since February, and indicates a further slide to $30. $30 is a 2012 support level and near the 50% retracement level of the 2009 to 2013 advance. On the other hand, a rally back above $41 indicates some buying interest and a potential re-test of the $48 region over the long-term. Another potential level to watch if price continues to slide is near $25, the 61.8% retracement level. In either case, don't catch the falling knife; wait for a higher swing high and higher swing low before jumping in.
The Bottom Line
Traders move in and out of the market so they are more apt to buy strength and sell weakness looking for quick moves and profits. Many investors and longer-term traders are looking for a "deal." They want to buy a stock at a low price. But just because a price is lower than it was doesn't mean it can't go even lower. Trends can persist for a long time. Small investors are nimble and can jump into a stock with minimal market impact, therefore there is no reason to buy a plunging stock. Wait til there are signs the selling has stalled and buyers are coming back in. Establish a point on the chart where you'll concede that the analysis was wrong, and place a stop loss there. A downtrend can always re-emerge, and holding onto a stock that fails to move higher or continues to move lower is an inefficient use of capital. (For related reading, see: Why A Falling Stock Is Not Always A Bargain.)