In any kind of market condition, some stocks show requisite price strength that makes them buy list or watch list candidates. If I'm looking to purchase a stock, I want to see it clear a price consolidation or 10-week pullback in heavy volume. Some secondary buy points also work frequently, but those are the main chart formations I scan for.
While it's sometimes advisable to get out of stocks -- totally or in part -- in a downward trending market, there are always strong technical charts that outperform the pack.
Even in the depths of the 2008 and 2009 bear market, some stocks, such as Green Mountain Coffee Roasters (GMCR) and Baidu (BIDU), showed better price performance than the broader market. These were two examples of stocks that became big leaders in 2009.
Stocks hovering near technical breakouts include a few small enterprise software makers. Kenexa (KNXA), with a $751 million market cap, makes software to help employers track human resources-related data.
The stock cleared a sloppy handle formation on Dec. 5, when it gapped 16% higher in enormous volume, after SAP (SAP) said that it would acquire another cloud-based human-resources software maker, Successfactors (SFSF), for $3.4 billion.
At that time, Kinexa wasn't ready for the big time and needed more time to consolidate. It retreated below its $26.50 handle buy point, and consolidated for eight more weeks before rebounding again. It's currently forming yet another handle below its latest point of resistance, at $30.48. If it clears that price in heavy volume, it could offer an entry point.
Another enterprise software name with a healthy chart -- and even better fundamentals -- is Deltek (PROJ), which makes project management software for engineering firms; hence, the stock's ticker.
This is another small company; its market cap is $733 million, and the stock moves only 82,000 shares a day, putting it in the 'speculative' category. The stock has a beta of 1.98, an indication of its volatility relative to the broader market.
Deltek has shown triple-digit earnings gains in the past two quarters, although revenue growth has been slowing.
Deltek is trading near its best levels since mid-2008. The stock pulled back from a January high of $10.87, and found support at its 10-week line. It rallied above the $10.87 level last week in above-average turnover, but retreated again. It's now down more than 5% from that earlier price resistance, so it would have triggered a sell signal for me. I typically sell lower-priced stocks with a maximum 5% or 6% decline from their purchase price.
Could it offer another buy opportunity in the not-so-distant future? Certainly. Whether it gets 10-week support again or forms a new basing area, the next buy point could come as it clears price resistance that would be determined by its trading patterns in the coming weeks. But for now, Deltek is best left alone, or perhaps on a watch list.
Finally, Manhattan Associates (MANH) is showing potentially bullish chart action. The stock's consolidation last summer, which occurred in tandem with the broader market, undercut lows of the prior pullback. That type of selloff frequently sets the stage for bargain shoppers to buy shares, which sends the stock rallying.
That's what happened to this maker of supply chain management software.
Its stock rallied to a 10-year high of $46.62 in December, then retreated into a seven-week pullback. It's now forming a handle area below the recent high of $47.52.
Recent trading ranges have been narrow, which is another potentially good indicator. When a stock acts like that, it signals that institutional owners are holding shares at a particular level, rather than taking an opportunity to grab profits after a run-up.
I'm currently watching for it to clear price resistance above $47.52, which could offer the next buy point.