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Tickers in this Article: SLXP, CAB, ACAT, VRSN
It's interesting that one of the most difficult trading conditions for a trader to master is buying during a runaway market. Even though most stocks are rising, after a few days, the vast majority of stocks are extended and thus offer inferior risk-reward setups. Even though many of these stocks will continue to rise through overbought conditions, traders are constantly faced with the difficult choice of deciding when a stock is too extended for a safe entry. The safest play for swing traders is to focus on stocks that are relatively close to support, but are still showing strength. By not chasing extended stocks, traders can avoid putting themselves in a situation where they are exposed to a drawdown in an otherwise strong stock. Salix Pharmaceuticals (NasdaqGS:SLXP) is a good example of a stock that is showing good overall strength, yet remains in a decent position. SLXP was trading in a wide but well-defined range as it consolidated from July through November (within a larger consolidation). Buyers stormed into SLXP in early November, propelling the stock through the trading range. After surging to new highs, SLXP has settled into a very tight range resembling a bull flag. Traders should watch for a break of this flag as it could present a great trading opportunity. (For more, see The Anatomy Of Trading Breakouts.)


Source: StockCharts.com


VeriSign (NasdaqGS:VRSN ) is another stock trading in a very tight consolidation within the context of an uptrend. VRSN has been following a consistent pattern of clearing small bases as it trends higher. It is currently trading in a tight range between $34 and $35.50 as it consolidates the move from its last breakout. A move above this trading range could provide a good opportunity for traders.


Source: StockCharts.com


Arctic Cat (NasdaqGS:ACAT ) is another stock that remains in a good position for traders looking to limit their risk. ACAT broke out of a base in late October and rallied approximately 50% in the span of a few weeks. It has settled into a consolidation that is developing into an ascending triangle between the $13 and $15 levels. Over the past few days, ACAT has narrowed even further and is trading within a range of less than one point. Traders should be on high alert, because a break above this tight range could lead to a sharp move.


Source: StockCharts.com


Cabela's (NYSE:CAB) is another stock that is not over-extended in the short term and could present a trading opportunity soon. CAB cleared a larger base in September and after a tight consolidation, it followed through much higher in November. CAB has since settled into a range between $21 and $23 as it works off some of the recent buying pressure. A break above $23 could lead to a new leg up for CAB. (For more insight, read Moving Average Explosions.)


Source: StockCharts.com


Bottom Line
During strongly trending markets, traders should really focus on limiting risk instead of setting their sights on the possible rewards. The strength in the market will take care of providing the profits as long as traders don't chop themselves up with normal stock retracements. Traders can greatly improve their performance simply by focusing on improving entries to levels that allow them to limit their risk. The four stocks above are close to presenting such opportunities, due to the formation of a tight range within an uptrend. Join us as we watch these stocks to see if they can clear their recent trading ranges. (For more, see Technical Analysis: Introduction.)

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

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