Scouting Out Purchase Points

 | Feb 17, 2012 | 2:00 PM EST  | Comments
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gnc

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rax

The majority of stocks tend to trade in tandem with the broader market trend. As the major indices have rallied so far in 2012, a number of stocks have bolted to new highs.

Of course, Apple (AAPL) is the most prominent name trading at lofty levels, but there are other stocks worth watching as they consolidate.

As a trend follower, I monitor stocks at or near fresh highs. In many cases, these are extended from technical buy points, and do not offer current entry points. However, stocks showing recent technical support are worth tracking on a pullback, because that frequently presents an alternate purchasing point.

One stock that has already retreated from a new high is InvenSense (INVN), which makes motion processing hardware for smartphones and other consumer devices. The company only recently had its initial public offering (IPO).

The stock went public at $7.50 in November, and then consolidated in December along with the broader market. It began rallying in January, as the indices gained strength. InvenSense reached an intraday high of $19.34 on Tuesday, but pulled back hard in subsequent sessions. That type of action is not unusual in newer stocks that are still developing their trading patterns.

As a newly public company, InvenSense is worth tracking on a watch list, as young stocks are often among the market's best price gainers. The recent pullbacks came with wide intraday price swings and heavy volume. These characteristics add risk to a trade, but I still consider this a stock to keep an eye on.

Another recent IPO, GNC Holdings (GNC), vaulted to a new high Thursday in 5x normal turnover. The retailer of health supplements reported a better-than-expected fourth quarter. The stock went public at $16 in April 2011. The shares were trading higher again Friday.

The company also raised its first-quarter and full-year earnings forecasts. This is another example of a stock that has extended beyond its buy point, but I will keep tracking it for the next entry opportunity.

Rackspace Holdings (RAX), which made its public market debut in 2008, also jumped to new highs after a recent earnings announcement. The stock had been showing a bullish cup-and-handle price consolidation prior to its fourth-quarter report. The company, which provides Web hosting services for business customers, gapped 12.6% higher in monster volume Tuesday after handily topping Wall Street's views.

It's not uncommon for analysts to weigh in with new ratings once a company has reported earnings, or when it's rallied to a new price high. With that in mind, I wasn't particularly surprised to see a number of analyst actions surrounding the stock in recent days.

Raymond James and Bank of America downgraded Rackspace, while Benchmark upgraded it to Buy from Hold. While news of analyst actions often results in some initial institutional buying or selling, the effects are generally short-lived, with professionals relying on their own analysis to determine Buy, Hold or Sell moves.

Rackspace pulled back after Tuesday's gap-up, but as of Friday, the stock was holding nicely above its short-term 10-day moving average. The fundamental growth prospects for this cloud play continue to look good, and I like its track record of investor confidence.

After the gap-up, the stock is a bit too frothy to buy right now, but it's another name I'll be tracking for its next entry point.

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