Skip to main content
number cruncher

What are we looking at?

Stocks with potential for a 10 per cent or more recovery rally.

The screen

We limited our pool to the stocks within the S&P 100 Index.

We looked at each stock's 40-week moving average (40wMA). This is the average closing price for the stock over a period of 40 weeks. Charting the moving average week by week gives us a sense of investor's behaviour: Are they growing more (or less) enthusiastic about the company's outlook and are they more (or less) likely to purchase the stock? Generally speaking, stocks that trade below their falling 40wMAs are not good candidates for investments; they are the ones that show a bearish behaviour.

We chose this indicator because stocks tend to stay relatively close to their 40wMAs. When stocks rise far above this average (more than 10 per cent), investors often use this as an opportunity for profit taking, since this usually leads to a price correction toward the 40wMA. Similarly, when stocks decline far below this average, suggesting a change in trend, investors can usually expect a recovery rally to follow toward the average, which also provides a selling opportunity.

We focused on the stocks that are trading at 10 per cent or more below their falling 40wMAs. These are the ones most likely to have a recovery rally toward their respective 40wMAs, where they could provide a good exit level.

More about Phases & Cycles

Phases & Cycles Inc. has been providing independent research for over 24 years, using behaviour analysis. It publishes investment ideas for both the Canadian and U.S. equity markets. Its research reaches more than 1,000 users across North America and Europe.

What did we find?

There are nine stocks on the S&P 100 Index that are 10 per cent or more below their 40wMAs. Among the most oversold are Aaron's, Borg Warner and Coach. In the adjoining table we summarize our findings.

Ron Meisels is the director of research and Monica Rizk is the senior technical analyst for Phases & Cycles Inc. (www.phases-cycles.com). They may hold shares in companies profiled.

U.S. firms with recovery rally potential

CompanyTicker$ Close Sep. 3040wMA $%
AAR Corp.AIR-N24.1527.05-12%
Aaron's Inc.AAN-N24.3229.70-22%
BorgWarner Inc.BWA-N52.6160.85-16%
CBS Corp.CBS-N53.5060.55-13%
Coach Inc.COH-N35.6143.20-21%
DR Horton Inc.DHI-N20.5222.50-10%
Ford Motor Co.F-N14.7916.25-10%
General MotorsGM-N31.9435.65-12%
Walgreen Co.WAG-N59.2765.85-11%