(By Rich Bieglmeier) Wall Street cheered the fiscal cliff agreement; stocks soared at the open, but have mostly stalled since. iStock decided to examine the charts of the NASDAQ 100 members to look for stocks that could continue higher if the rally has legs. After all, it is January and stocks rock at the start of the year.
It is a bit worrisome that a clear majority of the NASDAQ 100 members gapped up at the open and currently, mostly well off their highs. It puts the index, and stocks in a get going or back-up mode. Gaps need to be followed up with additional gains; otherwise, every gap up is danger of posting reversals. That's because gaps tend to come in one of two varieties, breakaway or reversal.
If the first trading day of the year's action is in the form of a breakaway, then a powerful follow through is coming. If not, there is a danger that a top was put in place – head-fake extraordinaire.
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Many of the NASDAQ 100 stocks jumped to resistance levels, and that's probably why most or trading below their intra-day highs. From a technical point of view, iStock would avoid most; however, we see two ideas worth considering.
Baidu, Inc. (BIDU) hasn't reached a relative strength reading of 70 or more like most other 100 members. The Chinese search giant's shares made their beyond resistance and 50-day moving average. While shares did gap up today, we like the upside to downside ratio. To the bottom, support can be found at the 50-day average of $99.97. To the top, the first level of resistance is at $110 and then $115. The last time BIDU busted through its 50-day average on a gap was in July.
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The stock ran from $114 to $135 on that trip. If stocks start in the red on Thursday, short-term investors might consider trying to add shares under $103, with a stop right under $100. The potential swing-trade offers $3 downside to the stop with $7 to $12 upside to our projected resistance targets.
Whole Foods Market, Inc. (WFM) is another that gapped higher and by resistance and its 50-day average. Additionally, the price exited a triangle pattern to the bullish side. Typically, such a move is bullish for a stock price going forward; however, iStock wouldn't be surprised to see WFM trade back to its 50-day average of $91.11 before WFM's next leg higher. It's the same patter Whole Foods followed in late July.
The upside to resistance, in our view, is $97ish, and traders might consider putting a stop in $89ish. At $91ish, the swing-trade offers downside of $2 to the suggested stop and roughly $6 of upside.
The fate of both trades depends on whether the gap up is a breakaway or a top. We'll probably know tomorrow.