Stocks finished strong in April, but the market stumbled in May, with the S&P 500 Index dropping more than 10% so far this month. Panic selling reflected an unwinding of optimistic sentiment as the market reached overbought levels at the end of April.
Now, with investors running for the doors, the technicals are starting to indicate that the market may be presenting an oversold buying opportunity. Actually, we have three oversold stocks in particular that are good buys right now …
But first, why should you listen to the technicals?
Trading By Instrument
We dwell on technicals during periods of market uncertainty because stocks typically become more sensitive to support and resistance levels.
Think of technicals as the instruments in the cockpit of a plane. When the weather gets stormy, the pilot is forced to “fly by instrument.” Currently, the uncertainty surrounding the European economy and its potential effect on the global economic recovery have large traders becoming more in tune with the technicals of the market to make their buy and sell decisions. In effect, they are “trading by instrument.”
Right now, we’re watching the market’s technical landscape for signs as to where stocks are heading.
And the Technicals Say …
Stocks benefited from an extremely oversold situation a few weeks ago. In fact, the market traced its recent bottom as the Relative Strength Index (RSI) readings of the major indices were reaching their most oversold levels since February. These readings indicated that the market was likely to reverse and move higher because selling pressure was exhausting itself. That meant it took fewer buyers to reverse the downtrend.
After a short rally, the market retraced back into oversold territory last week, at the same time we watched the S&P 500 trade to its “flash crash” bottoms. The retracement to the lows from a few weeks ago meets the criteria of what technicians refer to as a “double-bottom.”
Historically, the combination of a double-bottom and a technically oversold situation leads to short-term bullish situations. With that in mind, we thought we would provide a few charts that are displaying these technical qualities and, thus, an increased likelihood of seeing some short-term strength.
Oversold Stock #1: Lowe’s Companies (LOW)
Home improvement superstores were pulled down with the homebuilders during the last round of selling, despite the fact that many reports show some resilience in the retail sector.
Lowe’s Companies (NYSE: LOW) recently touched down to relatively oversold readings of its RSI as the stock bounced from its 200-day moving average. In addition, the stock is drawing a bottom at $23, which we consider an important level because the stock spent much of December through March consolidating at that price.
Our current technical target is $27, 10% higher than the price at the beginning of this week.
Get the name of a homebuilder whose technicals are also strong here.
Oversold Stock #2: iShares Russell 2000 Index (IWM)
The small-cap Russell 2000 Index has seen significant short-term
selling over the past two weeks as investors flooded out of the more speculative sectors of the market on economic concerns. This activity knocked
the small-cap ETF, the iShares Russell 2000 Index (NYSE: IWM), to a potentially significant support level.
In addition to the double-bottom, oversold situation we’ve already described, the IWM shares are also resting on their 200-day moving
average. The confluence of these three potential support levels should provide enough catalyst for a short-term bounce in the shares.
Oversold Stock #3: Bank of New York Mellon (BK)
Financial stocks have taken their share of the hit during this correction as financial regulatory changes are on the horizon. The selling surge
took many of the financial companies to their respective short-term oversold readings, according to their RSIs.
Among the list of oversold banks is Bank of New York Mellon Corporation (NYSE: BK), which also finds itself trading at its February lows. We like the potential for this long-term double-bottom to help push the stock out of its short-term
oversold condition back toward $32.
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