Trading Tip: Focus On The Healthy Stocks

By Joey Fundora | February 09, 2011 AAA

We've touched on how important it is to focus on stocks emerging from a healthy base on several occasions. Buying stocks that are extended from their base is fraught with risk as it leaves a trader vulnerable to even a routine pullback. This has become an even more important concept for traders to understand recently, due to the overbought environment and diminishing participation from leading stocks. The current rally, while remarkable, is also getting long in the tooth and it has been getting harder and harder to find healthy charts presenting traders with minimized risk. The market has become more of a stock picker's market and traders need to be careful, especially with many market leaders such as Coinstar (Nasdaq:CSTR), which are suffering through drastic corrections.

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Priceline.com (Nasdaq:PCLN) is a good example of a stock that has quietly been building on a healthy chart pattern and remains close to an important support level. PCLN had been rallying strongly throughout the latter part of 2010 and has been trading in a tight range between $420 and $440 for the past two months. A break above the $440 level could result in a continuation of its solid uptrend and would still be fairly close to a reasonable stop loss area. (For more, see 5 Strong Stocks Poised For A Breakout.)

Source: StockCharts.com



Wal-Mart Stores (NYSE:WMT) is another stock that has been about as quiet as it can be considering it is the largest retailer in the world. WMT broke out of a base a few weeks ago and has now pulled back to test the breakout area for support. This move took WMT over an important level and is putting it in a position where it could soon challenge for a multi-year breakout to new highs. While the all-time high is near $70, the next important resistance level to watch would be near $63. (For more, see Support And Resistance Basics.)

Source: StockCharts.com



OSI Systems (Nasdaq:OSIS ) is another stock that recently cleared a base and is now testing it for support. OSIS cleared the $38 level a few days ago and has been trading sideways in a tight range near this area on diminishing volume. This is healthy as traders digest the breakout attempt. Traders should watch for a move above $39.50, which would take OSIS to new all-time highs.

Source: StockCharts.com



MasTec (NYSE:MTZ) has a very similar looking pattern as well. It has been consolidating a strong breakout for the past four months as it trades between $14 and $16. In actuality, it cleared an important level just above $15 and has been holding above it for a couple of weeks, which could lead to a follow-through on the breakout attempt. The clear level to watch above is now the $16 area, which also coincides with multi-year peaks dating back to early 2004. A move above this level would certainly be an important development.

Source: StockCharts.com



Bottom Line
It can get quite dangerous for traders when the markets seem to rally every day. Fear of missing out often coerces a trader into making a poor decision and could lead to overtrading. While proper risk management should always be a vital part of a trader's plan, it takes on even more importance when the environment becomes riskier. While the markets have been showing great strength, investor complacency is turning it into a high-risk environment. Traders should remain focused on the stocks that remain healthy and offer a chance at minimizing their risk. (For more, see 6 Stocks Poised To Pop.)

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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