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Tickers in this Article: MR, GMCR, CTXS, MJN
After the recent pullback, it has become even more important for traders to focus their attention on stocks that have been able to build sound bases. A base comes from a healthy consolidation, and is often an important prerequisite for a stock emerging into a new sustainable trend. A sound base often takes time to develop, and quick or choppy bases often result in failed moves as there are still many participants from the prior trend anxious to take their profits. Once a stock emerges from a healthy consolidation, the base will usually serve as a strong support or resistance level because that area is filled with other traders who missed the breakout and are anxious to avoid missing a second opportunity.

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During a market correction, the strongest stocks will simply continue to consolidate rather than pull back. Stocks that can withstand sustained market weakness often reveal strong institutional support, and take on a leadership role as other stocks wither with the selling pressure. While the general markets are not out of the woods when it comes to the recent weakness, it never hurts for a trader to start building a list of stocks that are emerging from healthy bases.

Mindray Medical International Limited (NYSE:MR) is an example of a stock that has been able to withstand the recent selling pressure. MR emerged from a base in late December, surging from $34 to over $40 a share. While it gave back those gains, it did hold above the prior base and its rising 50-day moving average. The $34 level has held as support, and is the key level to watch moving forward. MR has begun to emerge from the recent pullback, and could head for a test of its recent highs.

Source: StockCharts.com

Green Mountain Coffee Roasters Inc. (Nasdaq:GMCR) has been one of the strongest stocks of the preceding bull market, and despite the outsized gains, institutions have been loathe to take profits. GMCR has remained close to its all-time highs over the past two months, even as the markets have corrected by a healthy amount. GMCR emerged from a base in December, and the breakout area near $78-$79 is an area to watch on further weakness in the markets. (For more, check out The Anatomy Of Trading Breakouts.)

Source: StockCharts.com

Citrix Systems, Inc. (Nasdaq:CTXS) is a stock that hasn't emerged from a base, but has been in the process of building a solid one for several months. CTXS was in danger of reversing the lower late in 2009, but was able hold support near $37 above a prior base. While the recent price action in 2010 seems volatile, CTXS has actually been consolidating above its 50-day moving average and above the late 2009 trading range. The $44 level is an important resistance area and a move above this level could trigger a rush of buyers.

Source: StockCharts.com

Mead Johnson Nutrition Company (NYSE:MJN) is another stock that has been working on building a base, even as other stocks have broken under important support levels. MJN has been able to hold above its 50-day moving average and well above its December lows. The $47.50 level has been a key area where sellers have capped recent rally attempts. A move above this area could have shorts scrambling.

Source: StockCharts.com

Bottom Line
While it wouldn't be prudent to rush into these stocks just because they have shown relative strength, if the markets can recover from the recent correction then these would be a good place to look for continued leadership. Stocks that are emerging from a healthy base should be less prone to a failed breakout, as shares have already been exchanging hands prior to the breakout. There shouldn't be as many traders looking to cash in for a profit, and hold on for bigger gains. Pullbacks theoretically would also be met with either new buyers who feel like they missed the boat, or existing holders adding to positions. The key for traders is to remain patient as the correction runs its course and then be ready to pounce on these stocks that have shown strong institutional support.

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

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