Looking for a Sign of Strength

 | May 24, 2012 | 9:16 AM EDT  | Comments
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Stock quotes in this article:

z

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RWM

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SKF

After Tuesday's volatile market session that saw stocks sell off late, the major averages did the exact opposite Wednesday, recouping losses of more than 1% and finishing near session highs. The action over the past couple of days is a reminder that volatility is alive and well as the market gropes for a bottom.

Thursday marks the fourth day of a rally attempt for the major averages, which means it's time to start looking for a sign of strength in the form of a big percentage gain in higher volume. A move higher with conviction from current levels would confirm a new uptrend and it would mostly likely force me to close my positions in Proshares Short Russell 2000 (RWM) and Proshares Ultrashort Financials (SKF). I went short the Russell 2000 when the index broke out to the downside from a bearish head-and-shoulders topping pattern last week. SKF, meanwhile, is a new position and if the market tells me my timing was wrong, I won't be afraid to cut losses short.

When stocks started to rally late in Wednesday's session, I received a few emails and tweets asking if it was OK to buy certain stocks that were moving higher in heavy volume. My response was that discipline is still important and that new purchases should generally be avoided during a market downtrend.

Small-cap 3-D printer maker Stratasys (SSYS) tempted investors Wednesday with a heavy volume breakout from an atypical cup-with-handle pattern. It was atypical because the base showed a steep correction when the left side of the base was built. Stratasys is a speculative stock with a market capitalization of just over $1 billion, but it has a lot going for it. The stock remains under accumulation, and the company has shown solid earnings and sales growth in recent quarters.

Headed into today, the stock was still within buying range, only 2% above a swing point of $53.39.

 

Stratasys (SSYS)
Source: StockCharts.com

 

Meanwhile, online real estate firm Zillow (Z) made a big move Wednesday, rising 8.65% to $40.19 in fast trade. Zillow went public in July at $20 a share. While Facebook (FB) recently acknowledged revenue challenges due to shift in focus to mobile, Zillow is singing a different tune. Zillow basically operates a real estate information marketplace via Zillow.com, but Zillow usage on mobile devices continues to be the real growth story. In the first quarter, more homes were viewed on Zillow's mobile applications -- where real estate agents buy local ads -- than on the Web.

Zillow continues to show strong technical action. It staged a technical breakout earlier this month -- clearing resistance at $39.48 -- after the company reported strong earnings. It recently fell below the buy point, but on Wednesday, the stock bounced bullishly off its 50-day SMA in heavy volume. The company's growth prospects are bright, with triple-digit earnings growth expected this year and next. When a new market uptrend resumes, this name has a good chance of being a leader.

 

Zillow (Z)
Source: StockCharts.com

 

Finally, is it a case of out with the old and in with the new? While online travel firm Priceline (PCLN) continues to muddle along underneath its 50-day moving average (SMA), shares of Expedia (EXPE) and TripAdvisor (TRIP) raced to new 52-week highs in heavy volume. I didn't buy either one for two reasons: First, the market is still in a downtrend. Second, both stocks were already extended after prior breakouts. Expedia broke out over $35.57 in heavy volume during the week of April 27. TripAdvisor, meanwhile, broke out over $37.78 earlier this month.

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