I am looking at the market's leading sectors right now for stocks that got hit hard but maintained positive technicals.
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The Dow Jones Industrial Average shed more than 292 points Wednesday, and the Nasdaq had its worst day in nearly a year with a 2.4% decline. And that evening, we got word that Saudi Arabia led military action against rebels in neighboring Yemen. The Street panicked and the Dow fell below 17,600 in pre-market trading, more than 600 points below Monday's high.
While stocks across the board saw steep declines on heavy volume, one of the worst hit sectors was the semiconductor group. The benchmark PHLX Semiconductor Index (SOX) plunged nearly 10% in less than four days and broke a small double-top formation to the downside in the process.
But no sooner than it had opened for business Thursday, it found its footing.
Technically it landed at support from a series of highs last year and a series of lows this year. The 200-day average was also in the vicinity, but the key for me was the measured target for the double-top breakdown. The height of the pattern projected down from the break was near lateral support and the 200-day.
Sentiment in the semiconductor group is even worse than it is for the broader market. The volatility index for the Nasdaq 100, which is home to a great many semiconductor stocks, soared even more than the broader market VIX, indicating more fear in this subset of the market.
But after gapping down on the open, SOX mounted an intraday comeback. The question now is which component stocks have similar positive technicals.
Some, admittedly, are quite weak, so their new lower prices are not necessarily cheap prices. However, some, especially those that were in solid rising trends with good inflows of money prior to the pullback, look to be on sale. Texas Instruments (NYSE:TXN) falls into the latter category.
Even after falling as much as 8% this week, the stock is still outperforming the broader market this year. And money flowing into shares ahead of the decline was solid, indicating strong demand. This is even more impressive considering money flowing into semiconductor ETFs has been waning all month.
To use an often-abused phrase, it seems that the market threw the baby out with the bathwater.
Note: One of the great things about technical analysis is that it takes the emotion out of trading. It gives us the gumption to buy when others are fearful. One of my colleagues uses a stock-ranking system that ranks every stock in the market from best to worst, allowing him to only invest in the very best stocks at that time -- whether other investors seem to love or hate those companies. If you want to learn more about this system and get the name of a stock that is flashing "buy" now, follow this link.
After gapping down on the open Thursday, TXN clawed its way back and spent the afternoon in positive territory. This can be viewed as a bullish reversal at support as buyers with conviction swooped in when others were shaken out.
To be sure, there are hurdles above, including the February and March highs. But one look at a long-term chart shows a rising trend. And on the short-term chart, momentum indicators such as Moving Average Convergence/Divergence (MACD) are still above the zero line, which is at least "not bearish." Others, such as the Relative Strength Index (RSI) have backed down from overbought levels to suggest that some of the rally's froth has been wrung out.
If I am right and TXN was marked down due to market fear, then I would expect a quick rebound to its old highs in the $60 area. I have set a tight stop just below Thursday's opening low because TXN should make a relatively quick move or it likely won't happen.
Recommended Trade Setup:
-- Buy TXN at the market price
-- Set stop-loss at $54.60
-- Set initial price target at $60 for a potential 8% gain in three weeks
By Michael Kahn
Source: http://www.profitabletrading.com/research/1/item/1931
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