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Stocks Following the Herd – Here’s How to Play It

Stocks are playing a game of "Red Light, Green Light," but you can come out the winner.


Video Transcript

Serge Berger here from The Steady Trader. The last two updates I made, I talked about very tight trading set ups in Fossil (NASDAQ:FOSL) on May 9. The stock is still looking to coil up and potentially bounce higher.

Then, on May 13, I talked about Coach (NYSE:COH), which also is at a pretty critical spot, forming a tight pattern and looking to potentially bounce up into the $61 to $62 area.

Sticking with this theme of one group after another breaking out over the past two week, it’s been almost like someone they’re with a green and red flag and holding up the green flag to signal that a new group of stocks can power higher. We’ve seen this rotation throughout the past two or three weeks, and it’s been wonderful to trade from a swing trading perspective because you’re playing simple break outs.

There are two more stocks I want to talk about today. One is Freescale Semiconductor (NYSE:FSL). To give you a little context, the Market Vectors Semiconductor ETF (NYSEARCA:SMH) had a bit of scary day May 13, but that was quickly negated by Wednesday’s trading.

If we look at FSL, it’s been trading in a tight pattern for quite some time. It shot off the April 22 low quite dramatically and just yesterday overcame the $16 resistance level. There was a lot of resistance there, and the stock tested it three or four times. Now, finally it’s been overcome.

If you look at the chart really closely, there was a shooting star candle Tuesday, which was also overcome Wednesday. There are a few other scary things on the chart that have been overcome, and, at least to my eyes, the stock looks like it can push higher into potentially the February 2012 highs, which gets us to about the $17.50 to $18 area.

That’s one example of a stock that’s had a tight formation and started breaking out Wednesday. If the broader market continues to move higher, this one likely has a pretty good chance of moving higher.

The next one is NetApp (NASDAQ:NTAP), also a stock that’s been showing us higher lows and higher highs for some time, but now hasn’t shown us a higher high since January. So we’re looking at a stock that’s been bouncing around on a trading range and a pierce through roughly about $36.50, NTAP should be able to push higher – quite a bit higher, likely.  I would imagine that the upward acceleration in NTAP should increase.

Now, it’s important to not trade a lot of these breakouts until they actually break out because, all argument’s sake, NTAP has been in a trading range since roughly mid-January. So there’s still a chance that the high will hold for now and it will move back down and remain in the range.

However, a break about $36.50 on a daily closing basis, preferably, would set up the stock quite well to push higher.

I hope everyone’s keeping an eye on this rotation of groups of stocks pushing higher and breaking out. The broader, of course, keeps going higher, as well. That is subject to change any day, but until this rotation of groups breaking stops, it should continue to work and I’ll keep watching these tight patterns for more breakouts.

Serge Berger is the head trader and investment strategist for The Steady Trader. Sign up for his free weekly newsletter here.

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