U.S. stocks seem to have lost their direction. After major indices reached all-time highs the day before Thanksgiving, the last seven sessions have seen uneven and modestly negative trading. That includes declines on Monday with stocks closing at session lows.
For skeptics who believe markets have run too far, recent trading might suggest that markets have peaked. For those still bullish on U.S. stocks, the modest pullback looks like a breather ahead of more gains.
Tuesday’s big stock charts highlight names that might be of interest to the latter group. All three charts highlight stocks that seem to have the potential for a reversal. The potential seems even higher if investors are willing to take on more risk, which could boost two of those stocks — and perhaps lead the market to look beyond the third for returns.
Canopy Growth (CGC)
Ahead of Monday’s 14% gain, there was some evidence that Canopy Growth (NYSE:CGC) had the potential to break out. After the jump, the first of Tuesday’s big stock charts gives some hope that the breakout can continue:
- The declining narrowing wedge pattern that began earlier this year typically is a reversal pattern. CGC stock exited that wedge last month. A breakout didn’t follow, but shares managed to finally stabilize and cleared the 20-day moving average. With Monday’s gains on big volume, the breakout seems confirmed and the 50-day moving average is cleared. Momentum traders may jump in here, and a still-hefty short interest could lead to covering.
- There’s a fundamental reason to see momentum traders jumping on board as well. The catalyst for Monday’s spike was the announcement of Canopy’s new chief executive officer: David Klein, the chief financial officer of Constellation Brands (NYSE:STZ,NYSE:STZ.B). Constellation of course owns over 40% of Canopy Growth, and Klein’s hiring raises hopes that Constellation Brands will buy out the rest. One analyst assigned the odds of a takeout at higher than two-thirds. Momentum traders may see the chart, the takeover hopes, and a possible short squeeze as an attractive combination, fueling a continued rally in Canopy Growth stock.
- Of course, there are risks. Past rallies have failed. As I wrote last week, Canopy’s growth rests on “Cannabis 2.0” products in Canada, and success there isn’t guaranteed. But Canopy Growth has a strong balance sheet, and along with Aurora Cannabis (NYSE:ACB), the industry’s broadest reach. That might be enough to keep optimism going, at least in the short-term.
EOG Resources (EOG)
Energy is another sector that has struggled over the past six months, and EOG Resources (NYSE:EOG) hasn’t been immune to the sell-off. But, like CGC, EOG is showing signs of life, and the second of our big stock charts suggests a recent rally could continue:
- The 20- and 50-day moving averages have provided clear resistance for EOG stock going back to May. But the stock finally has cleared those averages. It’s poised to exit a relatively steady downtrend as well. The breakout isn’t yet confirmed, but technically there’s a path to above $80, where EOG would run into the 200DMA.
- The recent rally, including Monday’s 0.74% gain, might be more impressive than it looks. EOG closed Monday in the green despite natural gas futures falling 4% to their lowest point since August. Nearly half of EOG’s reserves are natural gas and natural gas liquids, yet investors bid up EOG Resources stock anyway.
- Fundamentally, EOG stock isn’t necessarily cheap. A 15.6x forward price-to-earnings multiple is not notably out of line for shale producers at the moment. But the stock probably is cheap enough to rally, particularly if energy prices rebound and/or hopes for increased acquisition activity among shale plays return. It will take some optimism toward oil and gas prices and oil and gas stocks, but EOG is set up for a breakout if that optimism holds.
The third of Tuesday’s big stock charts, Medtronic (NYSE:MDT), also signals a potential reversal — but in the wrong direction:
- A narrowing ascending wedge is a reversal pattern, and MDT stock is nearing an exit point. The 20-day moving average still is providing support, but it doesn’t take much of a move to exit the wedge. From there, key levels are the 50DMA around $108 and then recent support at $105.
- To be sure, a huge sell-off is relatively unlikely. Medtronic is one of healthcare’s great companies. MDT stock is a Dividend Aristocrat, with 42 consecutive years of dividend increases. The balance sheet is in good shape. And MDT stock trades at just under 20x the midpoint of its fiscal 2020 (ending April) earnings per share guidance, hardly an aggressive multiple. This does not look like a stock headed for a crash, even with a 30%-plus rally from April lows.
- That said, there is some weakness on the chart. And if U.S. stocks rally again, at the least investors may rotate out of defensive stocks like MDT into higher-risk, higher-reward sectors. Those sectors might include cannabis and energy — two groups that have badly underperformed of late and thus look like value. Indeed, with MDT stock stalling out in recent weeks, it’s possible that rotation already has begun.
As of this writing, Vince Martin has no positions in any securities mentioned.