With the markets finally showing some signs of weakness, traders must become even more selective when choosing a trading opportunity. Although the markets can certainly continue heading higher unabated, the chances have certainly increased that we are in the beginning of some sort of correction. Even if the correction is minor, traders could see several weeks of sideways action and false breakouts. As such, it has become more important to focus on the highest quality setups with an eye on reducing risk.

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While some momentum stocks have been hit hard recently, there are still many stocks with healthy chart patterns. Rather than attempting to catch a falling knife, traders are often better served sticking to stocks showing these healthy patterns. One example is IronMountain Incorporated (NYSE:IRM). This stock has been working on a tight consolidation between approximately $24.50 and $25.30. IRM experienced a volatile trading period in late September through November that ended up resolving to the upside. The fact that IRM has been able to hold on to most of its advance could be hinting at accumulation occurring during that volatile time frame. Traders should watch this flag type consolidation closely in case IRM is able to clear it moving forward.

Another stock with a promising pattern is HMS Holdings Corp. (Nasdaq:HMSY). This stock has given up very little ground recently despite the general weakness of the past week. HMSY had cleared a larger base back in September and has been steadily trending higher other than a violent shakeout in late October. It has since settled into another consolidation above between $63 and $67. A breakout above $67 would take HMSY to new all-time highs. (For more, see The Anatomy Of Trading Breakouts.)

Carbo Ceramics, Inc. (NYSE:CRR ) is another stock holding near its all-time highs. CRR broke out of a base in late October and rallied up to and through the $100 price level. It has also been consolidating in a tight range just under its all-time high. Traders should key off the $105 level, as a move above this level could result in a resumption of the prior rally.

When you think of a healthy chart, a financial stock usually doesn't come to mind. However, while long-term Zions Bancorporation (Nasdaq:ZION ) is still well off its all-time highs, the near-term chart is actually showing some promise. ZION cleared a larger base near $23 in December and has been consolidating since then. It is forming a flag-type channel just under $25 as it pulls back to test the $23 level. Traders should monitor the flag pattern as an upside breakout could really catch some bears off guard.

The Bottom Line
Much of what happens with these stocks will depend on what happens with the general markets. If the markets do fall into a full-blown correction, than many of these setups will likely fail. However, by sticking to stocks with these types of patterns, traders can clearly define their risk and escape with minimal damage if the markets don't cooperate. However, by sticking with stocks in healthy patterns, traders can remain exposed to what has been a very strong market without excess risk. (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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