Sears Shows Its Softer Side

This column was originally published on RealMoney on July 19 at 10:28 a.m. EDT. It's being republished as a bonus for TheStreet.com readers.

No question about it, this is one tough market. I don't know about you, but I've been struggling with how to capitalize on the Middle East conflict.

I have been successful in remaining objective and detached, but that's not helping me formulate a plan of action. Why? Because I just don't have enough information to overcome the uncertainties. Here are just a few of the issues I am pondering:
  • If no cease-fire materializes, will stocks continue to be sold as folks eschew uncertainty in favor of safety?
  • If ground troops are sent into Lebanon, will the market fall in reaction to this escalation or will it be bought in anticipation of the defeat of Hezbollah?
  • If some type of cease-fire agreement is reached, will the crowd buy aggressively, or just yawn at the realization that a cease-fire is not synonymous with peace?
  • If Fed Chairman Ben Bernanke is dovish in his testimony on the hill, will stocks rally on the signal that the FOMC is likely to pause or will they fall further because Uncle Ben is signaling that the economy is weaker than previously thought?
  • Was that Hezbollah spokesman serious about having 2,000 volunteers to attack "U.S. interests"?
  • Where is that bull market that Jim Cramer says is always out there? I like the way some of the tobacco stocks are acting. Maybe I'll go long the "socially irresponsible" group. Come to think of it, I believe I'll feature these stocks in Thursday's column.
  • I still like the REITs. Maybe I should stick with smokes and real estate ( ex-homebuilders, a group that is still in search of a bottom).
  • Will resolution of the conflict wreck the oil company stocks, which are already weakening but still have pretty good relative strength?
  • Maybe the current bull market is in cash. After all, the dollar is back up above 87 against a basket of currencies for the first time in a few months.

With so many questions -- this is just the short list -- it's really tough to put together any type of game plan. And without a game plan, it's easy to give away money in small chunks in the same way that a frog allows itself to be boiled in water -- one degree at a time.

But let's check out some reader requests of some stocks that look interesting: Sears Holdings ( SHLD), Medtronic ( MDT), Smith & Wesson ( SWB), C.R. Bard ( BCR) and Cash America International ( CSH).

After breaking out from a tight volatility squeeze in March, Sears ran just high enough to form a double top. At this point, I'd start looking for buyers only when the stock has fallen back to the mid-$120s to test the prior breakout level. Until then, I'd look elsewhere.

Medtronic appears to be forming a higher low. However, this low won't be confirmed until the stock moves back above the July high of $48. We can see that the relative index is starting to perk up, which supports the thesis for higher prices.

Smith & Wesson has been making a series of higher highs and higher lows. The recent decline from $9 down to $7.50 sure feels like the beginning of the end. However, a closer look reveals that Tuesday's close was back at the 50-day simple moving average. As such, this benchmark moving average continues to act as support. Until that changes I'd be a buyer on dips. But I'd also use a really tight stop.

This weekly chart of C.R. Bard shows the breakout above $70 that ran clear up to $75 before finding the next level of supply. Notice how the subsequent pullback fell back down to $70 and attracted a new crop of buyers. That prior resistance level turned into support, as those who had sold too soon jumped at the second chance to buy. So where do you think your stop goes? Just below $70 -- because the stock will only fall back below $70 if buying interest dries up. A thrust above $75 sets the stage for the next leg up.

This weekly chart of Cash America shows the break above the May high at roughly $34.50. Last Thursday, the stock fell back to test the $34.50 level, but buyers snapped up the stock and the breakout held. Since then, the stock has remained strong despite the weakness in the broader market. If you're long, consider putting a stop back down below the breakout level.

Be careful out there.


Please note that due to factors including low market capitalization and/or insufficient public float, we consider Smith & Wesson to be a small-cap stock. You should be aware that such stocks are subject to more risk than stocks of larger companies, including greater volatility, lower liquidity and less publicly available information, and that postings such as this one can have an effect on their stock prices.

At the time of publication, Fitzpatrick was long Smith & Wesson.

Dan Fitzpatrick is a freelance writer and trading consultant who trades for his own account in Encinitas, Calif. He is a former co-manager of a hedge fund and teaches seminars on technical analysis, options trading and asset-protection strategies for traders and business owners. Fitzpatrick graduated from the McGeorge School of Law and was a fellow at the Pacific Legal Foundation, a nonprofit public interest firm specializing in constitutional law. He also practiced law in the private sector before pursuing trading as a full-time career. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. While Fitzpatrick cannot provide investment advice or recommendations, he appreciates your feedback; click here to send him an email.

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