Five Strong Stocks That Missed the Rally

The market looks set to pull back, but these stocks still have plenty of upside potential.
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This column was originally published on RealMoney on Jan. 12 at 10:54 a.m. EST. It's being republished as a bonus for TheStreet.com readers.

The strong January rally has lifted many sectors to multiyear highs, but the market is overbought and excess bullishness suggests stocks will pull back hard. There should be good opportunities.

Buying dips on a general downturn makes sense because strong stocks tend to recover when they pull back to support.

But dip plays have been tougher trades in recent years because the market has fallen harder than expected after rallies, or it hasn't fallen at all.

However, it's still the first trade to consider after a strong rally.

Alternatively, we can find maverick stocks that missed the boat when the indices pressed to new highs.

This is also a two-edged sword. Flat performance during a strong rally may reflect underlying problems.

If so, whatever held them back in a rising market could lead to a decline when momentum runs out of steam.

Keeping these admonitions in mind, I searched my database for five strong

S&P 500

components that missed the boat in the first two weeks of January.

With a little luck, these stocks will catch up while the broader market pauses to catch its breath.

Let's start with a strong stock that rarely finds its way onto a list of underperformers.

Express Scripts

(ESRX)

hit an all-time high in December above $90 and then pulled back for two weeks. It cracked $90 again several days ago, but was unable to break out to new highs.

Once the stock finds support, it could attract enough buying interest to rally above December resistance. That spike could set the stage for a strong move up and through the $100 level.

Qwest Communications

(Q)

ended the year with a bang, rising 50% in the fourth quarter. That impressive rally hit strong resistance at the 2003 high just above $6. It's been pulling back since then.

The stock just bounced off the 50-day moving average last week and could stabilize at current price levels. This base may set up a key test at last year's high and, with a little luck, a multiyear breakout. It's even possible this troubled company will trade in double digits sometime in 2006.

Crude oil is trading over $64 and the

Oil Services HOLDRs Trust

(OIH) - Get Report

is at an all-time high. But the January rally hasn't benefited all oil service companies equally.

BJ Services

(BJS)

is a case in point.

The stock rallied to a new high in December and pulled back. It found support at the 50-day moving average and pressed back to the high last week. It's been moving sideways since then in a small triangle pattern. A small uptick here should finally break resistance and trigger a strong rally into the mid-$40s.

Adobe Systems

(ADBE) - Get Report

is another stock having a tough time rallying above late 2005 resistance. It gapped up to a new high on Dec. 16, hitting $39.48 before starting a two-week pullback. It jumped back to the high a few days ago and is holding firm at this key level.

It looks like the third time will be the charm for this stock. So watch current price action at resistance closely because it could yield a sharp breakout over $40. In turn, that move would set the stage for a rally to challenge its high at $43.65.

Office Depot

(ODP) - Get Report

tagged a 52-week high this week, but just barely. It's been struggling around $32 since the start of January, trying to rally above resistance from its September high. Limp accumulation suggests the stock needs to find better sponsorship before moving considerably higher.

The good news: Recent price action is rounding out a bullish cup-and-handle pattern that predicts an eventual breakout. The stock has made good progress this week and could see strong upside later this month.

Alan Farley is a professional trader and author of

The Master Swing Trader

. Farley also runs a Web site called HardRightEdge.com, an online resource for trading education, technical analysis and short-term investment strategies. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Farley appreciates your feedback;

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