While the overall S&P 500 uptrend remains intact, there are warning signs present. During uncertainty, trading the strongest or weakest stocks in S&P 500 can be advantageous. The S&P 500 SPDR (ARCA:SPY) is currently "mid-wave"- in between a recent high and low point-making it difficult to enter high probability trades with attractive risk-to-reward ratios. Certain stocks though are pushing through former highs indicating continued strength, or pushing past former lows indicating continued weakness. These relatively strong and relatively weak stocks provide opportunity even when the trend in the S&P is being questioned.
Netflix (Nasdaq:NFLX) is one of the strongest stocks on the S&P 500; trading near $100 at the start of the year, it recently hit a high of $334.50. Along with the broader market it too saw a pullback recently, but has rebounded strongly closing at $321.69 on October 15, up from $282.8 five trading days prior. Unless the price can't make it above $334.50 (high), there are three progressive price targets to watch for. The first is $340, and if passed aggresively the next is $355 followed by $377. $300 is support, and if this uptrend is to remain strong it should hold. A break below $300 warns of a weakening trend.
Best Buy (NYSE:BBY) closed at $40.62 on October 15, a level not seen since 2010. This is another of the strongest stocks on the S&P 500, up from the $12 mark at the start of the year. The next upside target is at $41.75, which is also near a potential long-term resistance area. If this area is cleared $43.50 is the next target. Beyond this there is a strong long-term resistance band at $45 all the way up to $49. $36.50 should now act as support, and drop below weakens the trend. Given the proximity to resistance and the strong rally, a drop below the trendline at $36.25 is a major warning signal.
J.C. Penney (NYSE:JCP) stock continues to fall. It is trading at less than a tenth of it's 2007 high at $87.18. The October 15 close at $7.17 is also well below the $20 level the stock opened at this year. Shorting the stock is somewhat risky without a tight stop, as a shake up in the company could create short-term price spikes. Ideally the stock is suited to short-term swing trades on the short-side at minor resistance levels. The nearest resistance area to look for shorts is between $7.40 and $7.75. A rise much beyond $8.25 warrants backing off. Very large volume on the latest wave down indicates the downtrend is likely getting close to exhaustion, but only if the company can form some sort of fundamental turnaround.
Abercrombie & Fitch (NYSE:ANF) is a stock prone to large gaps and price swings. So far this year, the bulls have been on the wrong side of those price movements. A drop below $33 will likely lead to a test of primary support in the $30 area. If that support area is breached it will break a 4-year head and shoulders pattern signaling further declines. On the other hand, a rally above $39.30--still a ways away from current levels--could indicate an attempt to fill the $7 price gap from August. Avoiding trades within several days of earnings announcements is advised, as risk can't be controlled on price gaps.
The Bottom Line
Looking at the strongest and weakest stocks provides a snap-shot of what has been moving recently, but may not necessarily be the truth a week or a month from now. Weak stocks eventually rebound (usually) and strong stocks weaken. Trading the strongest and weakest stocks provides a high potential reward, but volatility surrounding these securities means losses can also mount quickly if caught in a reversal. Stops are always recommended, but use extra caution in taking short-term trades near earnings announcements, as the stop-loss may not adequately control risk if the price gaps.