Even in weak or uncertain market conditions, one sign of technical strength for an individual stock is a gap higher.
In the past couple of sessions, while indices either turned lower or struggled to find direction, a number of stocks outperformed.
On Wednesday, Whole Foods (WFM) gapped 2.6% higher as a Jefferies analyst boosted his price target to $90 from $68. Effects of analyst actions are often short-lived, but the buying caught my attention, as it came in heavier than the prior session's.
The stock has some fundamental factors in its favor. Margins are better than industry peers, and the company's value-based 365 line of products has been a hit with shoppers, perhaps putting something of a dent in the chain's "Whole Paycheck" reputation.
The stock has hit resistance around $73, but market conditions haven't been supportive of too many stock rallies. The chart action is constructive, as its Aug. 9 low undercut the prior low of $53.92 from June. That's often a bullish signal, showing that investors without conviction have been flushed out, perhaps setting the stage for new money to send the stock higher.
Also gapping up amid Wednesday's downside trade was marine liquefied natural gas transporter Golar LNG (GLNG). The stock jumped 5.4% in the heaviest turnover since June on Wednesday's news that the company would rent out one of its tankers to a major energy firm. The terms call for payment of $39 million for a three-year rental.
Analysts see an enormous jump in profitability this year, to $0.93 a share from 2010's $0.01 per share. Growth of another 76% is expected in 2012, as demand for LNG transport is expected to remain strong.
The stock has been forming a solid base, after pulling back from a late July attempt to clear resistance just below $40. It's been shaping the right side of its consolidation, and has climbed 22% so far in October. As of Friday, the stock was trading about 3% below the peak of its consolidation.
So far, it has not retraced its gap higher, and I plan to keep watching to see if it can clear that high in sustained volume.
One stock that rallied on Friday was mattress maker Select Comfort (SCSS), notching further gains following a gap higher in the previous session. It jumped off the mattress, bolting 20.5% Thursday in enormous volume after a better-than-expected third-quarter report.
The company said consumers began spending again on bigger-ticket items like its Sleep Number mattresses, after holding back on such purchases in recent years. Sales at Select Comfort have been growing at double digit rates in the past three quarters, after slowing to the high single digits in late 2010.
Institutional confidence in the company's prospects remains high, with analysts eyeing profit growth of 77% this year and 23% next year.
As of mid-session Friday, Select Comfort was up nearly 30% on the week, and had cleared a three-month price consolidation.
With any stock that gaps higher on good news, it's not abnormal to see some back-and-fill action in subsequent sessions, especially in volatile market conditions. It can mean that investors who bought earlier are grabbing profits, but as long as the stock retains support above its key 10-week line, it's a signal that enough institutions have conviction about the stock, and are holding shares.
Select Comfort is getting a bit extended after clearing its previous high, but a healthy pullback could offer the next technical entry point.