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Tickers in this Article: HSY, MFLX, RBCN, NYT
It may sound silly to be looking for stocks that are vulnerable to downside in the midst of a strong two-week rally, but as a trader, one must always be prepared for any possible scenario. The general markets are pushing up against strong resistance levels and are already oversold according to several indicators. Some peripheral indicators, such as the McClellan oscillator and the VIX, are also signaling that the current rally may be extended. While oversold markets don't guarantee that they won't keep going higher in the near term, it is a warning that the odds of a pullback or pause are increasing. Often, rookie traders will try to catch the top in stocks during these market conditions, but fading rallies is a very difficult trade to master. Traders are often better served searching out stocks that have failed to capitalize on a rally. These are the weakest stocks and the most likely to resume heading lower when the markets pull back.

The Hershey Company (NYSE:HSY) is a perfect example of a stock that has not participated at all in the recent rally. In fact, HSY has been grinding lower and is testing several-month lows. HSY technically remains in an almost five-month-long consolidation after a strong rally that began earlier this year. Despite the fact that it hasn't broken down from the base, HSY is showing clear weakness in the near term that may foreshadow an eventual breakdown. HSY set a lower low in late July and has not been able to trade back above its 50-day moving average for two months. A break below $45.50 would put many holders of this stock under water and possibly trigger even more selling.

Source: StockCharts.com


While Multi-Fineline Electronix (Nasdaq:MFLX) may have been able to rise along with the markets over the past two weeks, it was so damaged technically over the past month that the recent bounce is only a small blip on the radar. MFLX had a sharp drop from a large base in late August on an increase in volume and remains well below the breakdown area near $24. It also remains well off its declining 50- and 200-day moving averages. MFLX is currently pausing near its 20-day moving average and appears to be headed back down for a retest of its recent lows under $20.

Source: StockCharts.com


Rubicon Technology Nasdaq:RBCN) is a stock that not only hasn't participated in the current rally, it actually has headed in the opposite direction. RBCN had held the $25 level throughout the month of August and attempted to rally off this support level with the bounce in the markets. However,this move quickly failed and RBCN headed lower on high volume and remains vulnerable to more downside.

Source: StockCharts.com


New York Times Company (NYSE:NYT) has been able to rally along with the markets, but much like MFLX, the recent rally has simply enabled a retracement of the prior decline to occur. NYT is currently trading up into prior support near $8.50 and could see sellers reappearing soon. While this would be the first level to watch, there is also significant resistance near $10.

Source: StockCharts.com


Bottom Line
Even if the markets end up breaking to new highs in the next few weeks, the odds are favoring a short-term respite soon. While the respite may be nothing more than a pause, it could be more than that, too. In either scenario, the stocks that are most likely to head lower are the stocks that have been showing weakness despite overall strength in the markets. The stocks above have been underperforming the markets and could make good short sale candidates if the markets do indeed take a breather and pull back from resistance levels.

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The author does not hold a position in any of the companies mentioned above at the time of this writing.

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