Stocks kicked off the second quarter of 2014 with a bang yesterday (and that’s no joke).
Although the stock market was in pullback mode throughout most of March, the price and volume patterns of the past two days indicate last month’s correction may soon become old news.
If that’s the case and stocks soon resume their steady, upward trend, will you be fully prepared to profit?
First, let's get up to speed on the current technical state of the broad market, then I will highlight some of the top stocks to potentially buy this month (if market conditions continue improving).
NASDAQ and Russell 2000 – Getting Back In Business
Stocks followed through on the previous session’s bullish reversal attempt with an impressive round of gains yesterday.
The bullish recovery was led by the NASDAQ Composite (for a change), which enabled the tech-dominated index to reclaim both is 20 and 50-day moving averages (the sibling Nasdaq 100 did so as well).
More importantly, higher volume accompanied yesterday’s advance, enabling the NASDAQ to score its first confirmed accumulation day in more than a month.
The Russel 2000 is also back in business, as the small-cap index closed above both its 20 and 50-day moving averages as well.
Below are daily charts of the NASDAQ Composite and Russell 2000 that show the technically significant improvements:
Why Moving Averages Matter
Moving averages play a very important role in our daily analysis of the overall stock market. Aside from price and volume, moving averages are one of the most important indicators of our trading strategy.
In bull markets, the 50-day moving average is our pivotal “line in the sand.” During corrections and pullbacks, the main stock market indexes must hold onto this level in order for us to continue operating on the long side of the market with confidence.
When the major averages subsequently get back above their 20-day exponential moving averages and hold, we can then get excited about new long setups because the potential for a new uptrend (or resumption of the previous uptrend) increases.
Overall, we can step on the gas pedal again when all the major indices move back above their 20 and 50-day moving averages (and hold for more than a day or two) after a substantial correction.
Divergent Stock Market Indexes
While this week’s price action was certainly a step in the right direction (so far), both the NASDAQ and Russell 2000 are now in “no man’s land” because the indexes are back above resistance of their 20 and 50-day averages, yet still must contend with resistance of their prior highs and short-term downtrend lines that have formed.
On the other hand, the benchmark S&P 500 rallied to a fresh all-time high yesterday, as higher volume confirmed the move as well.
Although the S&P 500 corrected alongside of the NASDAQ last month, the retracement off the highs was relatively shallow (less than a 38.2% Fibonacci retracement):
Both the Dow Jones Industrial Average and S&P Midcap 400 indices did not close at record highs yesterday, but still managed to record new closing highs for the year.
The breakout to new highs in the S&P 500, along with yesterday’s higher volume recovery in the NASDAQ and Russell 2000, was enough to put our stock market timing model back into “neutral” mode (previously in “sell” mode since March 21).
If the NASDAQ manages to finish above its 50-day moving average this week, our market timing system may shift back to a “buy” signal.
Best Stocks To Watch In April
In terms of leadership stocks, the following stocks remained healthy throughout last month’s correction and are still quite strong:
Michael Kors Holdings Limited (NYSE:KORS), Tesla Motors Inc (NASDAQ:TSLA), Under Armour Inc (NYSE:UA), Synaptics Incorporated (NASDAQ:SYNA), and United Rentals Inc (NYSE:URI).
All of these stocks have the potential to quickly surge to new highs if broad market conditions remain solid.
InvenSense Inc (NYSE:INVN) and iRobot Corporation (NASDAQ:IRBT) are also holding up pretty well, while Facebook (NASDAQ:FB) appears to have formed a significant bottom by following through on last week’s bullish reversal candle.
Our most recent buy entries into FB resulted in two separate price gains of 49% and 12% earlier this year, but we would still consider re-buying FB if it presents us with a low-risk re-entry point (such as a cup and handle pattern) in the coming weeks.
Tesla Motors – Still The Hottest Stock To Buy
Of the stocks listed above, TSLA remains one of the best “must own” stocks for any bullish portfolio. Aside from its incredible growth rate and other fundamentals, the technical chart pattern remains solid as well.
Like most stocks in the market, TSLA also pulled back from its highs last month, but the retracement was less than 20% off its peak. Considering the stock has zoomed more than 400% higher over the past year, a 20% retracement off the highs is quite minor by comparison.
Further, the stock has pulled back to and is now holding key support of its 50-day moving average. A pullback to this level is often when institutional program trading kicks in for leading stocks.
Overall, the price action in TSLA remains quite healthy, and we anticipate the stock will soon resume its impressive, long-term uptrend and once again cruise to new highs.
However, after last month’s low becomes established as a pivotal support level, we will finally raise the stop to protect our large gain, while still allowing enough “wiggle room” for the gains to accumulate even more substantially from here.
Two For Today: Zulily and Quantum Fuel
Going into today, both Zulily (NASDAQ:ZU) and Quantum Fuel Systems (NASDAQ:QTWW) are “official” buy setups on our Wagner Daily stock watchlist.
With ZU (see chart below), we like last week’s “undercut” of both the low of the February 25 gap-up bar ($51.35) and 50-day moving average. That probe below two key support levels (which shakes out the “weak hands”) was followed by yesterday’s heavier than average volume rally above the two-day high.
From here, we expect bullish momentum to power ZU substantially higher in the near to intermediate-term:
The second ticker on our “official” watchlist going into today, QTWW, is consolidating in a tight range on the weekly chart, after breaking out from a tight range on big volume a few weeks ago. The base on base chart pattern (shown below) should eventually be resolved with an explosive move to the upside.
QTWW has an IBD relative strength ranking of 99, and is a member of the number 1 ranked industry group (Energy-Alternative/Other), so it definitely has explosive potential:
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