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Tickers in this Article: PNRA, ONXX, DLTR, REGN
The past few weeks have been a little tricky to position for as the markets could really move in either direction very soon. The markets have been basically trading sideways after the sharp reversal in early August, and while it's possible they are trying to bottom, it is also quite possible that they are simply pausing before another leg down. While the more likely scenario is further downside, traders need to be prepared for all scenarios and be ready to jump on an opportunity once the markets decide which direction to take. One way to do this is to have a list of plays ready for each scenario.

For instance, if the markets begin to break down from the channel they have been following, it could lead to a breakdown in Panera Bread Company (Nasdaq:PNRA). PNRA has been following a similar channel to the markets, as it consolidates its early August breakdown. It backed off the $115 level the first time it tested it later that month, and has been stuck under its 200-day moving average since then. This is a critical level for PNRA, as it was the bottom of the prior base. If PNRA falls out of the channel it has been following, it should lead to a test of its recent lows under $100 and possibly more. (For more, see Channeling: Charting A Path To Success)

Another stock poised for downside if the markets falter is ONYX Pharmaceuticals, Inc. (Nasdaq:ONXX). ONXX has also been following a channel after breaking down under a base in early August. This is the same pattern the markets are following and ONXX remains under not only its 200-day moving average, but also its 50-day moving average. Much like the markets, a breakdown under the channel may signal a new leg lower.

So while a breakdown in the markets probably has higher odds than a short or intermediate term bottom, the possibility cannot be ruled out. Every time the indexes veer towards the bottom of the recent range, buyers step up and help reinforce the lows as support. Overall, the markets are still oversold lending help to the bottoming case. If the markets can somehow avoid a breakdown, stocks like Regeneron Pharmaceuticals, Inc. (Nasdaq:REGN) may be worth watching. REGN fell in early August with the markets, but then came roaring back to life in the subsequent weeks. REGN cleared an important level near $61 and then surged higher before stalling out near $75. REGN had stalled out in the $70s back in May as well, and this level proved to be difficult again. REGN is now drifting back towards its base and could find support near $60. If it can stabilize near this level and get some help from the markets, it could set the stage for a rebound higher.

Dollar Tree, Inc. (Nasdaq:DLTR) is also worth watching in case the markets can rebound from these levels. DLTR is showing great relative strength, by breaking out above its base despite the recent action in the market indexes. It is also drifting back towards its base, and any market strength would likely lead to a resumption of the uptrend.

The Bottom Line
Trading is more often than not an exercise in being prepared, and not in predicting the next move. There are usually conflicting signals to varying degrees, and the most successful traders are the ones that can absorb the information and simply adjust their thinking. This is difficult to do if you are emotionally tied to a specific outcome. By preparing for multiple scenarios, a trader can easily adapt to a changing environment.

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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