Interesting..

Commentary: As the stock market continues to drift higher, it is allowing for many individual stocks to setup for possible moves higher. While the markets are starting to get overbought, it’s possible that there is still room for more upside movement in the coming weeks. If the markets do push higher, then many of these stocks that have been developing healthy patterns for several months may receive the final push they need to clear resistance.

One stock that has quietly been developing a base is Williams-Sonoma, Inc. (NYSE:WSM). WSM began a correction in May of last year that took the stock down from over $44 per share to near $28 in a few months. It then began to trade sideways before attempting to rally later in the year. Ultimately, WSM kept stalling near $40 as sellers stepped in. All the back and forth action has resulted in WSM forming a more complex pattern known as an inverse head and shoulders. This is often a bottoming pattern and the neckline for the pattern is $40. If WSM were to close above that level, it would confirm the pattern and likely lead to an end to the correction that began last year. (For more, see How To Trade The Head And Shoulders Pattern)

 Expedia, Inc. (Nasdaq:EXPE) is an example of a stock that has already cleared its base, but is stuck under resistance nonetheless. EXPE has been forming a base since last year as well, with the top of the pattern lying near $29. EXPE recently cleared this level and has been consolidating in a tight range resembling a bull flag just above $29 for several days. EXPE struggled with the low $30’s after a failed spike to that level in August 2011 and this would be the key level to keep an eye on. Any strength above this level could lead to a breakout in the stock.

Biogen Idec Inc (Nasdaq:BIIB) is another stock close to testing a key level. BIIB cleared a larger base in October 2011 and has been consolidating above it since then. It has yet to test the highs near $120 it hit during that breakout, but the consolidation has been very constructive. BIIB found buyers near $110 and appears to have locked in this area as clear support. It is now attempting to move off this level and already cleared a trendline that was marking the previous two highs. It appears that BIIB is on its way to test for a breakout and only a failure that carries it back under $110 would negate that view.

 Estee Lauder Companies, Inc. (NYSE:EL) is an example of a stock in a healthy pattern but likely still not ready to emerge from its secondary base. EL cleared the $105 level in November 2011 as it broke out from a base it had been forming for most of the year. It has maintained trading above this base since then and hasn’t even filled the open gap left in the low $100’s. This is showing great strength and willingness for buyers to step up on weakness. The $105 level appears to have held as key support, and EL should be on its way for a test of $120.

Bottom Line
While the markets have started to move higher again, there really hasn’t been a drastic change in character. The markets remain vulnerable, especially after starting to become overbought. Strength is still being faded, so traders need to remain nimble and open minded. However, the markets rarely keep the same pattern for too long, and at some point fading breakouts will stop working. I mention this because there is still a decent chance that the markets can press higher and if they do, it will present opportunities for the prepared trader. The stocks mentioned above have all been developing for months, and could be poised to take advantage of market strength if presented with the opportunity.

Charts courtesy of stockcharts.com

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