Stocks Regaining Their Health

By Joey Fundora | October 19, 2011 AAA

With the stock market continuing to show strength the past few weeks, many stocks have been healing much of the damage that occurred earlier in the year. Many stocks that were in danger of completing topping patterns were able to stave off a breakdown. While the coast is certainly not clear, it is appropriate to start monitoring many of these stocks in case the markets have indeed bottomed for the year.

ARIAD Pharmaceuticals, Inc. (Nasdaq:ARIA) has been a very strong performer since it bottomed out in 2009 at under $1 per share. It had rallied to multi year highs in July, before reversing along with the general markets in August. While the decline was steep, ARIA held support near $8 and began to consolidate. The consolidation was taking the form of a head and shoulders topping pattern, and ARIA appeared to be breaking down in early October. However, ARIA held support near $8 once again, and is now close to clearing the right shoulder of the pattern. If ARIA can clear its September highs, it would negate the pattern, and could fuel a short covering rally.

Elan Corporation, plc ADR (NYSE:ELN) is another stock that looked like it was in trouble just a few weeks ago. ELN was in the midst of a strong rally for much of the summer before caving in to selling in August. This is a very similar pattern among the majority of stocks since it tracks what the indexes were doing. ELN had been consolidating in a wedge type pattern since hitting lows in August, and managed to stave off several attempts at breaking under the pattern. It nominally cleared the pattern a few sessions ago as is now consolidating near the top of its recent range. Traders should keep a close eye on $11, as any persistent strength above this level would likely lead to a test of the July highs.

Hot Topic, Inc. (Nasdaq:HOTT) also came crashing lower during August as the markets experienced some turbulence. However, it held key support near $6 and rebounded in a straight line to new yearly highs. It has since been consolidating near these highs as it drifts in a small channel. It held a test of its 50-day moving average and is now starting to press against the top of the channel. If HOTT can clear this channel and the $8.50 level, it could set the stage for a breakout to new highs.

While it may be hard to identify on the volatile chart for Ulta Salon, Cosmetics & Fragrances (Nasdaq:ULTA), it also threatened to break down from a topping pattern in August and September. If you look closely, it also was working on a head and shoulders type pattern, with the neckline forming near $50. It first tested this level in June, and then again in August. It not only held this level on both tests, but volume increased dramatically on the rebound from this level. ULTA ultimately gapped above its 50-day moving average in September as it raced to new highs. It has remained above its 50-day moving average since then and has been consolidating near the top of its range. A push above $70 could signal a pending breakout.

Bottom Line
While the markets are certainly extended in the near term, they have shown good strength in the bounce from recent lows. This has helped a great deal of stocks become healthier and many are starting to present possible buying opportunities. Traders should continue to exercise caution, as the markets remain vulnerable to some profit taking, but it appears that there is a good chance the markets still have some upside from here. If the markets can build off the recent strength, then these stocks may follow through on their recent improvement. (For more, see Technical Analysis: Introduction) Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

Charts courtesy of stockcharts.com

At the time of writing, Joey Fundora did not own shares in any of the companies mentioned in this article

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