Building a watch list is a fundamental aspect of trading the stock market. There are many different ways for a trader to screen for possible trading candidates and much of this process will depend on the trader's style or trading technique. However, regardless of what type of trader you are, it is important to maintain a list of stocks that may act in a certain way depending on what the markets do next. With the markets clearly showing strength, yet already up in a straight line for a few weeks, many stocks are extended and not offering optimal entries. One list traders should be building is a list of stocks that may offer an optimal entry in a few days if the markets cooperate.

The markets have been trading sideways for the past week and it's possible that they could continue to correct through time before surging to new highs. If this occurs, having a list of stocks that are aligned to this scenario will allow traders to position themselves to take advantage of the breakout.

Tutorial: Technical Analysis

Mattel (NasdaqGS:MAT), for instance, is a stock that could be setting up for a breakout in a few days if the markets cooperate. MAT has been trading in a base since late 2010, and has started to narrow in range as it approaches the $26 area. This has been the general top of the base and MAT should be monitored to see how it deals with this area. A tighter trading range in this area followed by a move in the markets could offer a great trading opportunity. (For more, see 5 Strong Stocks Poised For A Breakout.)

Source: StockCharts.com



Lockheed Martin Corporation (NYSE:LMT) is another stock that could be setting up for a nice breakout. LMT experienced a sharp rally to start the year and has since settled into a tight consolidation between $78 and $82. LMT is already testing the top of its range, but the key is for the markets to cooperate and help boost a breakout. Without an individual catalyst, many stocks are at the mercy of the general trend.

Source: StockCharts.com



Interestingly, the aerospace/defense sector yielded another stock in a similar pattern. Embraer S.A. (NYSE:ERJ ) has also been trading in a tight range between $32 and $35 after a strong move earlier in the year. It just tested the $35 area again and is pulling back toward its 20- and 50-day moving averages. If ERJ finds support here and begins to test another breakout along with the general markets, it could present a great trading opportunity.

Source: StockCharts.com



Hanger Orthopedic Group (NYSE:HGR) is a stock that has quietly been trending higher for several months. It has been following a pattern of trading in a tight consolidation followed by a quick breakout. The key for trading a stock like this is to get a safe entry and simply hop along for the ride. If the markets continue to consolidate for a few days, it could keep HGR in a similar pattern of trading in a tight sideways range. HGR has held support near $25 over the past few days and could drift back to this area again. Traders should monitor this area on any continued market consolidation to see if HGR continues to find buyers. If it holds this area and turns higher along with the markets, it could offer a low-risk entry.

Source: StockCharts.com



The Bottom Line
The markets have shown an amazing resiliency over the past several weeks, and the chances of continued strength are certainly plausible. However, nothing goes up in a straight line forever, and the markets are vulnerable to some regression. This could be presenting a scenario in which the markets will not be ready to resume their uptrend for several days. The stocks above could be in patterns that would need a few days to fully develop and could be properly aligned to such a scenario. While it's possible that none of this will come to fruition, being a successful trader is mostly about being prepared to trade multiple scenarios, rather than attempting to react to every fluctuation. If the markets trade higher in a few days, these stocks are likely candidates for a breakout.

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

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

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