Strategizing for a Market Fall...or Rally Tickers in this article: DHI, HRL, MU, LPL Major stock indexes are being hit hard, with the SPDR S&P 500 (SPY) losing 5.1% between August 19 and 21 and reaching the lowest levels since November 2014. With support broken, many traders and investors are looking for an exit, but a downtrend isn't confirmed yet. A rally can't be ruled out; if it comes, be in the stocks that held steady or dropped the least during the index sell off (showing relative strength). If stock indexes continue to fall though, short sell the weakest stocks. Below are a handful of relatively strong and weak stock examples.The idea behind relative strength/weakness is that if no one wants to sell a stock when the market declines, a recovery in the index is likely to bolster the stock price. Similarly, if people are selling a stock even when conditions are good, they are likely to continue selling regardless of if the index recovers or not.
From an overall perspective, the S&P 500 has made a lower swing low. The downtrend isn't confirmed until we see a pullback, which creates a lower swing high (definition of a downtrend). If the pullback/rally creates a new high, an uptrend is a possibility again (if followed by a higher swing low). Once there is more confirmation of the trend, that's the time to step in and trade the stocks below (not necessarily right now).
DR Horton Inc. (DHI) 
DR Horton Inc. (DHI) is an example of a stock that has continued to trend higher through 2015, even while the S&P 500 was stagnant. The stock is still trading near its 52-week high of $32.37, and well above support at $26, while the major indexes have fallen below 2015 support levels.
Lennar Corporation (LEN) is in the same industry as DR Horton--residential construction--and has a similar looking chart. The stock is trading near the 52-week high and is trading well above support at $50.
Hormel Food Corporation (HRL) 
Hormel Food Corporation (HRL) did sell off 3.48% on August 21, but overall the stock remains in a strong uptrend and is still close to the $64.13 52-week high. A rising trendline puts support at $58, and the August 21 close of $61.38 means that support level isn't in danger of being broken yet.
Micron Technology, Inc (MU) 
Micron Technology, Inc (MU) is an example of a relatively weak stock. While major indexes were flat-lining through much of 2015, Micron Technology was falling. The stock hit a 52-week low on August 21 at $14.24. This is a stock to look for short trades in. Not necessarily at current levels, but a weak bounce into resistance near $17.50 may provide such an opportunity.
Fellow semiconductor company AU Optronics Corp. (AUO) is in a similar downtrend, showing relative weakness. SunEdison, Inc. (SUNE)--from the same sector--is in free fall, losing more than 65% of its value since mid-July.
LG Display Co. Ltd. (LPL) 
LG Display Co., Ltd. (LPL) is relatively weak, as it has declined throughout 2015. Selling accelerated on August 21 as the major indexes also sold off. LG Display finished down 5.98% on the day, to close at a new 52-week low of $8.64.
Another weak stock is Yandex N.V. (YNDX), an internet company out of the Netherlands. It has lost more than half its value since December and traded to a new 52-week low of $10.98 on August 21.
The Bottom Line The above stocks are relatively strong and relatively weak. That doesn't mean buying or shorting them at current price levels. They are stocks to watch for potential trades though, once there is more confirmation on the long-term trend direction in the indexes. Consider where you'll enter, place a stop loss and take profits. The profit potential of the trade should outweigh the risk. One thing to keep in mind is that relative strength and weakness will change over time. What is strong this month may become weak next month, or vice versa. Strong stocks should stay above support to remain buy candidates, and weak stocks should stay below resistance to be considered short sale candidates.
Refine Your Financial Vocabulary Sign up to receive our FREE Term of the Day newsletter. Gain a better understanding all things financial with technical and easy-to-understand explanations. Click here to begin developing your financial language with this daily newsletter. Disclosure - At the time of writing, the author did not own shares of any company mentioned in this article.
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