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

Related Articles
  1. Technical Indicators

    Use Market Volume Data to Determine a Bottom

    Market bottoms often carve out classic volume patterns that let observant traders make fast and accurate calls.
  2. Charts & Patterns

    Understand How Square Works before the IPO

    Square is reported to have filed for an IPO. For interested investors wondering how the company makes money, Investopedia takes a look at its business.
  3. Trading Strategies

    Who Actually Trades or Invests In Penny Stocks?

    Although penny stocks are highly speculative, millions of people trade them daily. Here are 10 different types who do.
  4. Chart Advisor

    4 Stocks Still Flashing Buy Signals

    In the midst of volatility and a big market sell-off last week, these stocks are flashing buy signals.
  5. Technical Indicators

    Understanding Trend Analysis

    Trend analysis is the use of past performance to predict future price movement of a security.
  6. Trading Strategies

    How To Buy Penny Stocks (While Avoiding Scammers)

    Penny stocks are risky business. If want to trade in them, here's how to preserve your trading capital and even score the occasional winner.
  7. Chart Advisor

    Stocks to Short...When the Dust Settles

    Four short trades to consider, but not quite yet. Let the dust settle and wait for a pullback to resistance for a higher probability trade.
  8. Technical Indicators

    Using Moving Averages To Trade The Volatility Index (VIX)

    VIX moving averages smooth out the natural choppiness of the indicator, letting traders and market timers access reliable sentiment and volatility data.
  9. Chart Advisor

    Strategizing for a Market Fall...or Rally

    The downtrend isn't confirmed yet, so be prepared with trades for whether the stock market rallies or continues to fall. Here's how to do it.
  10. Trading Strategies

    Are You a Trend Trader or a Swing Trader?

    Swing traders and trend traders execute market timing strategies that require different skill sets.
  1. Fintech

    Fintech is a portmanteau of financial technology that describes ...
  2. Indicator

    Indicators are statistics used to measure current conditions ...
  3. Intraday Momentum Index (IMI)

    A technical indicator that combines aspects of candlestick analysis ...
  4. Mass Index

    A form of technical analysis that looks at the range between ...
  5. Money Flow Index - MFI

    A momentum indicator that uses a stock’s price and volume to ...
  6. On-Balance Volume (OBV)

    A momentum indicator that uses volume flow to predict changes ...
  1. Tame Panic Selling with the Exhausted Selling Model

    The exhausted selling model is a pricing strategy used to identify and trade based off of the price floor of a security. ... Read Full Answer >>
  2. Point and Figure Charting Using Count Analysis

    Count analysis is a means of interpreting point and figure charts to measure vertical price movements. Technical analysts ... Read Full Answer >>
  3. What assumptions are made when conducting a t-test?

    The common assumptions made when doing a t-test include those regarding the scale of measurement, random sampling, normality ... Read Full Answer >>
  4. How are double exponential moving averages applied in technical analysis?

    Double exponential moving averages (DEMAS) are commonly used in technical analysis like any other moving average indicator ... Read Full Answer >>
  5. How do you know where on the oscillator you should make a purchase or sale?

    Common oscillator readings to consider making a buy or sale are below 20 or above 80, respectively. More aggressive investors ... Read Full Answer >>
  6. What are the alert zones in a Fibonacci retracement?

    The most commonly used Fibonacci retracement alert levels are at 38.2% and 61.8%. A 50% retracement level is also commonly ... Read Full Answer >>

You May Also Like

Trading Center

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!