As I’ve been telling subscribers the past few weeks, there’s a split in the market these days—the major indexes are sagging and are near their 2010 lows, yet many individual stocks are still in grinding uptrends during the past few months. In fact, this past weekend I made it a point to closely examine the weekly charts of the major indexes and many stocks (each chart has three to four years of history).
What I saw surprised me: Many stocks are building long, multi-month launching pads, despite the weak indexes. In fact, more than a few formed sound launching pads, broke out in July, and are now forming other bases on top of the prior consolidations—that’s known as a “base on top of a base” and is usually a bullish pattern.
I’ve also seen a few choice stocks actually pushing consistently higher in recent months in a volatile way. Of course, it will all depend on the market’s next big move, but this pattern of gradually higher highs during the four-and-a-half-month market pullback tells me these stocks want to move higher.
Two that have similar patterns are Netflix (NFLX) and Akamai (AKAM), two big-cap stocks that I feel have the potential to help lead any coming market advance. I won’t delve into the nitty-gritty of the fundamentals. Suffice it to say that NFLX is positioned as the leader in on-demand video, while AKAM has the largest content-delivery network in the world, and is poised to benefit as video and data traffic continue to soar … partly thanks to on-demand video offerings from the likes of Netflix!
What intrigues me is that both of these leaders have very similar chart patterns—they each corrected sharply at the end of June, and then bounced for a couple of weeks in July … but failed to reach new-high ground. And then each fell sharply again—to lower lows—after disappointing reactions to their earnings reports near the end of July.
That lower low caused a shakeout and formed what is known as a double bottom pattern. But for the pattern to be complete, the stocks would have to race to new highs soon after that second low. And they did! Both moved up in a big way as institutions piled in.
Now NFLX and AKAM have pulled back toward the top of their prior double bottom patterns, hovering above their respective 50-day moving averages. If you’re aggressive, I think you could buy a little (maybe a third or half of your normal-sized position) of one or both here … as long as you keep a tight, 5% to 7% protective loss limit on each position.
If the market can find a low around here and begin a sustainable advance—and I think there’s a decent chance of that—then both NFLX and AKAM have a shot at big gains.
Click here to learn more about Netflix, Akamai and other leading stocks featured in Cabot Top Ten Weekly.