Four Stocks to Keep an Eye On

The recent downdraft in the stock market (not counting Tuesday) has been fierce and swift. But we live in a trading environment that rewards the investor ready for the wild swings and who is prepared to take advantage of them. I'm going to show you some simple rules for finding value in a market like the one we have now and how to avoid the stocks that won't perform.

I don't foresee another major sustainable move in the general market this year -- I had thought that our rally from the March '09 lows was overdone and the latest downdraft of close to 10% from those highs has been long overdue and necessary.

Yes, there is concern about sovereign debt in Greece and the possibility of that increased risk bleeding into Portugal, Spain, Ireland and even Italy. It is the possibilities of the latest Armageddon that create the quick selloffs like the one we've seen in the past several sessions. But it also provides the best opportunities.

How to Find the Buying Opportunities

I've picked out two stocks that demonstrate what I look for in selecting plays for a market that's undergone the kind of pressure selling we've seen recently. These stocks provide only the template, and it's always better when you've done your own homework and selected your own candidates.

Most of these tricks are technical in nature and can apply to many stock sectors, although you need to know at least a little of the fundamental stories attached. You'll feel better picking out your own selections, too.

The first is Valero Energy ( VLO), also one of my top stocks for 2010:

I'm showing you the weekly chart to get some perspective, but the daily chart will be more useful in generating entry and exit points. But here's the thing: The refiners, including Valero, have been under heavy pressure from disintegrating margins. But at this low point, there are only two ways for the stock to go -- either Valero will not overcome its margin challenges and the stock will be range-bound, or it will solve them, even to a limited degree and regain some of the share value that they saw from '06 to '08. What a great definition of a real opportunity. The upside potential is huge, while the downside risk is extremely limited.

Here's another, in a sector I know far less about, Alcoa ( AA):

Alcoa has seen obvious pressure from a worldwide recession and deep cuts in industrial growth, although the stock price has recovered a little in the last eight months. But the recent downturn has again stripped the stock of more than 25% from its highs of $17.45 to closer to $13 yesterday, creating a similar story to our refiner Valero: We may not soon see the $35-$40 Alcoa share price that dominated '07 and '08 until the global growth picture turns around, but while you're waiting, you're far less likely to get hurt.

And notice that I select industrial, blue-chip names with low beta risk, clean balance sheets and even some dividends. We're not looking for flyers, we're looking "only" for superior risk/reward opportunities.

Here are two examples of stocks I'd tend to avoid, Johnson & Johnson ( JNJ) and Kellogg ( K):

Both of these represent the noncyclical consumer stock that investors always flock to in extreme market stress. They've attracted so much defensive interest from investors that their stock prices are not that much further behind at this point than they were at the height of the general market in late 2008.

These are fantastic companies and could be worthy of inclusion in anyone's portfolio. But when we're looking for candidates to take advantage of the big downdraft we've just seen, from a value perspective, these just don't make the grade.

It is possible that the tone of the general market has changed, where strong and sustainable gains will be rare, and every rally needs to be sold. It is possible that sovereign debt risk will continue to reverberate throughout Europe, multiply and continue to put pressure on U.S. and international equity markets. If that happens, the extreme defensive names like JNJ and Kellogg's could be the most vulnerable, while our value names like VLO and AA should remain far less affected.

That's precisely what we should shoot for when we're selecting stocks to buy in markets as volatile as this one -- stocks with good upside potential and limited downside risk. When you find them, don't be afraid: You may take a hurtin' for a week or even a month, but you're sure to make a lot of money in the long term.

At the time of publication, Dicker was long Valero Energy.

Dan Dicker has been a floor trader at the New York Mercantile Exchange with more than 20 years' experience. He is a licensed commodities trade adviser. Dan's recognized energy market expertise includes active trading in crude oil, natural gas, unleaded gasoline and heating oil futures contracts; fundamental analysis including supply and demand statistics (DOE, EIA), CFTC trade reportage, volume and open interest; technical analysis including trend analysis, stochastics, Bollinger Bands, Elliot Wave theory, bar and tick charting and Japanese candlesticks; and trading expertise in outright, intermarket and intramarket spreads and cracks.

Dan also designed and supervised the introduction of the new Nymex PJM electricity futures contract, launched in April 2003, which cleared more than 600,000 contracts last year alone. Its launch has been the basis of Nymex's resurgence in the clearing of power market contracts over the last three years.

Dan Dicker has appeared as an energy analyst since 2002 with all the major financial news networks. He has lent his expertise in hundreds of live radio and television broadcasts as an analyst of the oil markets on CNBC, Bloomberg US and UK and CNNfn. Dan is the author of many energy articles published in Nymex and other trade journals.

Dan obtained a bachelor of arts degree from the State University of New York at Stony Brook in 1982.

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