Potential Change of Trend, Plus Stock Setups

In my most recent post (seen in the post below), I went over why I felt in mid-April that the strong uptrend from the first quarter of 2012 had run its course. Specifically, I pointed to the heavy level of distribution that had hit the market in a short period of time, along with the 10-day moving average undercutting the 20-day moving average. The chart below depicts the reasoning behind my heightened sense of caution:

These two factors - price/volume action of indexes and positioning of the moving averages - give me a sense of what big institutional money is doing and indicate the overall trend in the market. When I saw caution lights, I raised cash and limited my actions to simply following the market action on a daily basis, looking for clues of a change in trend.

This past week, we saw some developments that I would characterize as bullish, leading me to finally dip my toes back into the market after sitting out the past month and a half. First, Wednesday's booming 2.3% move to the upside on higher volume had all the characteristics of a follow-through day, except it occurred on the third day of a rally attempt instead of the fourth day or later. While I don't want to sound heretical by discounting the "fourth day or after" rule, I am encouraged by the indication of institutional accumulation, something that was severely lacking during the month of May. Secondly, I've started to see a good number of stocks setting up in recognizable patterns (I'll detail these setups below), which is a prerequisite to any sustained rally. Without leading stocks with strong fundamentals leading the charge, any uptrend in the market is not likely to be sustainable. As a result of these factors, I took two positions on Wednesday in LQDT and ROST:

LQDT has been basing for five weeks above its rising 50-day moving average, and has managed to stay near a new 52-week high throughout the correction in the overall market. The base shows relatively low volume, with the exception of a dip to the 50-day moving average, which was bid up aggressively by the bulls. Finally, the stock's strong relative strength tells me it wants to go higher, and has only been restrained by the headwinds of the overall market.

After a strong uptrend, ROST spent the month of May consolidating sideways, whereas the overall market slid precipitously. The stock has climbed up the right side of its base, and is currently basing right below the breakout point of 64.65. The 10-day moving average has recently provided support, a good sign that bulls are eager to snatch up shares on even a slight pullback. 

If these stocks begin to reverse and show signs of real weakness, I have stops in place that will put me back into cash. If they work, and the market builds on some of the strength it exhibited last week, I feel they could be two of the leaders of the next uptrend. Below are some similar stocks that are basing nicely, displaying relative strength, and sporting strong fundamentals. I'll be tracking these names closely as potential new long candidates: