Just when investors thought it might be safe to go back in the water, along comes another red tide of panic-style behavior out-the-gate Wednesday. But before you throw in the towel on this market, realize it’s a much stronger time to consider when and what stocks to watch in a bottom which could be closer than you think. Let me explain.
It was a terrific or at least a solid-looking Tuesday. The broad-based S&P 500 finished up a whopping 5.17%. Enough said, right? But that wasn’t the only reason investors may have found themselves excited. The volatile gain also reversed an ugly correction which officially turned into a bonafide bear market as the index slumped 20.65% from its February high intraday. But that’s not the best part.
Despite Wednesday’s early counter punch from bears and more COVID-19 concerns driving the price action, today marks day two of a follow-through day or FTD count. That’s important. And given the market’s historic fallout over the past three weeks the FTD event demands investors pay even greater attention to this market indicator, keep a clear head and remain optimistic.
The question you might be rightfully asking is why a follow-through day is so critical for the market and when it comes to considering stocks to buy? The fact is every single bull market has been preceded by this event. Get it? And amid today’s ultra-fast algorithms, high frequency traders and the likes, the beauty of the follow-through day is its simplicity.
A follow-through day or ‘FTD’ typically occurs four to seven sessions after an intermediate market low is established. At its core, one or more market averages need to rally by 1% or more on heavier volume during this critical window of time. Simple, right? There is a catch though.
The actual gain required of a follow-through day falls into a gray area. The 1% gain is only a minimum threshold. During more volatile periods like the current market environment, a rally in excess of 2% and more likely upwards of 3% is understandably necessary. It makes sense of course as volatility works both ways. Using a lesser gain as the basis for a FTD and buying stocks would increase the chance of entering under a false positive signal without the support of a meaningful market bottom in place.
Now and with the simple yet devilish details for this critical market event out of the way, here’s one market heavyweight, one market leader and one stock to watch that’s been sunk, which could see recovery operations underway in the near future.
Stocks to Watch: Microsoft (MSFT)
Source: Charts by TradingView
Microsoft (NASDAQ:MSFT) is the first of our stocks to watch. As the world’s second largest publicly-traded company and just behind Apple (NASDAQ:AAPL), it makes sense to monitor the health of this category of stock. Without the help of mega-cap stocks it’s going to be a tough challenge for a successful FTD to actually follow-through rather than flop.
Technically, MSFT stock is at a make-or-break point on the price chart. Optimistically, shares are in a testing position of the 38% retracement level tied to the last broader market corrective bottom in December 2018. There’s also a prior resistance line which could act as price support that’s being challenged.
The bad or concerning news for Microsoft is the illustrated monthly view clearly shows a February topping candle. The bearish-positioned doji was also confirmed during this week’s slide in share price. What’s more, stochastics is just falling out of an overbought condition after a bearish crossover with no signs of the indicator bottoming.
Net, net there’s good reason to see Microsoft as a very important stock to watch in today’s market and whether a healthier environment can be found in the days ahead.
Regeneron Pharmaceuticals (REGN)
Source: Charts by TradingView
Regeneron Pharmaceuticals (NASDAQ:REGN) is the next of our stocks to watch. I also see this large-cap biotechnology outfit as a definite stock to buy if a FTD materializes. The more clear-cut bullish optimism for REGN stock is partly due to shares demonstrating leadership throughout the coronavirus-driven correction in the market. But that’s not all that Regeneron has going for it on the price chart.
As technical rotations and fresh leadership go hand-in-hand with bull markets as they emerge from the ashes, Regeneron is in position to make good on this promise. Bottom-line and unlike most other larger industry-leading stocks, REGN is just now breaking out of a bear market of approximately 4.5 years in duration.
Again, I’d caution Regeneron is only a stock to watch for now. However, if a FTD is confirmed and shares reclaim the 62% retracement level above $478 inside the corrective base, REGN is certainly a leading stock to buy with superior prospects.
Carnival Corp (CCL)
Source: Charts by TradingView
Carnival Corp (NYSE:CCL) is the last of our stocks to watch. Along with Royal Caribbean (NYSE:RCL) investors have been washing their hands of this global cruise line operator. That’s no surprise to anyone following the news as the coronavirus has unfolded the last few weeks. But the sinking in CCL shouldn’t be considered a Titanic-like failure either.
Carnival’s earnings and sales are definitely going to take a big hit for the foreseeable future. That’s not rocket science. More importantly, the technical collapse captured on the monthly chart shows CCL stock is inside a key band of price support spanning its entire history as a publicly-traded company.
My advice for this stock to watch and as a stock to buy is simple. I’d wait for shares to find a bottom and avoid a further sinking within today’s wide and volatile support zone. And without question this event will include a confirmed bottoming candle. Bottom-line, no market vessel has ever seen a successful recovery operation without one.
Disclosure: Investment accounts under Christopher Tyler’s management do not currently own positions in any securities mentioned in this article. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT and StockTwits.