Snapback Stocks for the Week of Aug. 17

Bank of America, Cree and Goldman Sachs are among several stocks that could rebound.
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By Roberto Pedone

BALTIMORE (

Stockpickr

) -- Currently, the stock market is being hit with a tremendous amount of negativity in the media. There is a ton of talk on the financial news channels and in print that a pending market crash is going to happen. A lot of this talk is based around the Hindenburg Omen, a technical analysis pattern that basically measures the underlying condition of the stock market.

The main theory behind this indicator is that a major market correction has a high probability of occurring because the underlying technicals of the market are deteriorating. A number of conditions need to be triggered in order for this bearish indicator to flash a major warning sign.

These key conditions are as follows: The daily number of NYSE new 52-week highs and the daily number of new 52-week lows must be greater than 79. The daily number of NYSE new 52- week highs and the daily number of new 52-week lows must both be greater than 2.2% of total NYSE issues traded that day. The NYSE 10-week moving average is rising. The McClellan Oscillator is negative on the same day, and the new 52-week highs cannot be more than twice the new 52-week lows.

The Hindenburg Omen needs to see this trigger twice in a 36-day period in order to get a sell signal. As of right now this has only triggered once, so market players should not worry about it for the moment.

I think investors would be better served scanning the market for stocks with snapback rally potential. All of the fear in the market right now could be setting up a number of names for sharp moves, since it seems to be that a majority of market participants don't believe the market can move substantially higher from here.

A snapback rally is basically when the market or a specific stock rallies sharply off of oversold conditions. This rally usually comes very quickly and produces a lot of volatility that short-term market players love to see. Snapback rallies also have a tendency to produce very large gains for investors who're positioned correctly.

Here 's a look at a number of stocks that could be setting up to have a major

snapback rally.

One stock with lots of snapback potential is

Cree

(CREE) - Get Report

. This company manufactures LED products, silicon carbide and gallium nitride material products, and power and radio frequency products.

On Aug. 11, the company reported revenues increasing by 79% during the fourth-quarter versus the same period a year ago. However, the stock was hammered after the company issued first-quarter revenue guidance that was well below expectations. For the first-quarter Cree said it expects revenue in the range of $270 million to $280 million. Wall Street was looking for revenues around $283.96 million.

In just the last five trading sessions, not including today, the stock has dropped almost 15% or around 10 points. This seems way overdone to me and you can bet that the high short interest of 15% on this name had a lot to do with that big drop. This stock is a complete battleground between the bulls and the bears, but as long as the world continues to move towards more energy efficient products, Cree will not be down for long.

I expect to see some a major short squeeze develop in the short term that could take it back towards the 200-day moving average of $63.61. I especially think this target can be reached if Cree can trade above $60 a share. Look for support at around $55 to hold in order for a meaningful snapback rally to occur.

Another name that could be setting up for a decent snapback rally is

Bank of America

(BAC) - Get Report

, a bank holding company and a financial holding company. This stock has been crushed recently after the shares failed to trade above the 50-day moving average of $14.54 and were subsequently sold off on heavy volume.

Just a few months ago this stock traded as high as $19 share and now shares are changing hands at around $13.27. As long as BAC can hold support at around $13 a share, a meaningful snapback rally towards $14.50 to $15.70 could be in the cards.

A significant catalyst that could help to propel Bank of America higher is the news out on Monday that hedge fund manager

John Paulson

added to his position in the bank through the purchase of 30 million warrants. Paulson also acquired 1.1 million shares of

Goldman Sachs Group

(GS) - Get Report

, so look for a snapback rally in that name as well.

In fact, Goldman is the perfect snapback rally candidate since the stock is so hated. Look for a move in Goldman back towards the 200-day moving average of $157, as long as the near term support of $147 can hold.

Another name with big snapback potential is

Hewlett-Packard

(HPQ) - Get Report

, a global provider of products, technologies, software, solutions, and services. This stock was sold off sharply following claims that former CEO Mark Hurd made inappropriate payments to a former HP marketing contractor without a legitimate business purpose. The board at HP decided to terminate Hurd and avoid any unwanted press since some of the claims from the contractor were of sexual harassment.

I think the move by HP's board was a smart one and the stock has suffered unjustly since this event. Shares of HP have dropped from $48 a share all the way down to its current price of around $41. I like that the stock has started to move higher and could be putting in a near term bottom. Look for shares to have a more meaningful snapback rally towards the 50-day moving average of $45.51.

One group that I would not look for a snapback rally in are the education stocks, such as

Strayer Education

(STRA) - Get Report

,

Corinthian Colleges

(COCO)

,

ITT Corporation

(ITT) - Get Report

and

DeVry

(DV)

. These stocks were absolutely hammered on Monday following a report from the Department of Education that said nearly two-thirds of the schools' students did not repay federal loans. The required amount of repayment rate that the government looks for is 45%, and unfortunately due to the tough economic times, many of these names fell well short of that amount.

In fact, the only two educations stocks that meet the government's criteria were

American Public Education

(APEI) - Get Report

and

Bridgepoint Education

(BPI) - Get Report

.

As tempting as this group might look -- considering that a number of names plunged by over 20% yesterday -- I would avoid this sector at all costs. There is just too much political risk and uncertainty as to what the final outcome will be once regulators and legislators have had their way.

And even though many of these names look cheap from a valuation perspective (trading at low to mid-single digit multiples), I think these stocks will become value traps and get even cheaper before all of the carnage is over.

To see more stocks with snapback potential such as

Cisco Systems

(CSCO) - Get Report

and

Children's Place Retail Stores

(PLCE) - Get Report

, check out the

Snapback Stocks of the Week

portfolio on Stockpickr.

-- Written by Roberto Pedone in Winderemere, Fla.

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