4 Stocks Nearing Resistance

Often, when the market bounces after a weak period, traders will rush to short the most popular stocks that have had a strong rebound. The usually flawed reasoning is that the stock is too "high," or too "expensive." While there is some merit to a mean reversion trade, often the leaders tend to rebound quicker and hold more of their gains when the markets finally do turn. The safer play is to focus on stocks still showing weakness and below important support levels. Investopedia Markets: Explore the best one-stop source for financial news, quotes and insights.

Much like when a strong stock finds support during a healthy pullback, weak stocks will likely have trouble once they return to a prior support level from underneath. For example, Home Inns & Hotels Management Inc (Nasdaq: HMIN) had been holding near $33 on several occasions earlier this year as it drifted lower. It ended up breaking under this level in late September. The breakdown was likely foreshadowed by the steady decline in its 200-day moving average and HMIN's struggles with the moving average. Now that HMIN fell underneath the $33 level, the area will likely act as resistance. With HMIN approaching this level already, it won't be long before we find out. (For more, see our Moving Averages Tutorial.)



Boston Properties, Inc. (NYSE:BXP) is another stock that may struggle with a prior support level. The chart for BXP may not have very clear patterns, but the action is actually well defined. BXP was looking bullish until its reversal in July/August. After a sharp plunge, it rebounded and attempted to build a small base. However, that base quickly fell apart and BXP is once again trying to mount a charge. However, BXP is under key support levels near $95 and near $90. Traders should watch this area to see if it will fail.



Sohu.com Inc. (Nasdaq:SOHU) is a stock that had been grinding lower until finally bouncing over the past few weeks. However, keeping things in perspective, SOHU remains in a clear downtrend and has been steadily setting lower lows and lower highs. SOHU still has some room above it as it tries to reach the $70 area, but it may already be struggling to simply eclipse the $60 level. Any weakness from this area could easily take SOHU to new lows.



Another stock that has had a difficult time sustaining any strength is Potash Corporation of Saskatchewan (NYSE:POT). POT fell under its base in September and rapidly fell more than ten points. It did rebound rather quickly from the sharp plunge, but it is approaching the $50 level which could be a tough area for bulls. Traders should carefully monitor how POT reacts to this level, as any weakness here could lead to much lower prices.



The Bottom Line
Despite the very strong rally over the past couple of weeks, there are still several stocks with damaged or unhealthy charts. Even if the markets are putting in an important low, it will take some time before most stocks can be considered safe. In the meantime, stocks that remain under key support levels could easily see more declines, even in a benign environment. And if the market turns sour again, then these stocks would likely succumb to the pressure. In either case, sticking to the weak stocks has much better odds than shorting strong stocks that have "gone too far." That is a strategy that could leave you in the poorhouse. (For more, see Technical Analysis Introduction.)

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