These four top performing stocks have had huge gains this year, but the monthly technical analysis favors a correction heading into the end of the year and MoneyShow's Tom Aspray recommends that investors have a plan in place to protect their profits.
Stocks have stabilized overnight, as the unexpectedly large injection of funds by the Chinese central bank has had a positive impact. This appears to have temporarily offset the news over the Eurozone crisis.
The day's close is what is important, and a higher close Thursday would be a short-term positive. The heavy selling Tuesday does favor a sharp day to the upside by early next week.
Though the PowerShares QQQ Trust (QQQ) is up over 22% for the year, some of the top-performing stocks show triple-digit gains. While many of these top performers still look positive technically, there are some that have started to flash warning signs, and that makes a correction likely before the end of the year.
Investors in these stocks need to have a plan in place now to protect their profits through either disciplined use of stops, taking partial profits, or by hedging their positions in the options market.
Chart Analysis: Mellanox (MLNX) is a $4.1 billion Israel-based broad-line semiconductor company that closed 2011 at $32.49 and hit a high this month of $120.05.
- The monthly chart shows that MLNX has closed above its monthly Starc+ band for the past five months.
- It does look as though MLNX will close this month lower, and a close below the August low of $102.51 would be a sign of weakness.
- The first support on the weekly chart is in the $90 area.
- The 38.2% Fibonacci retracement support is at $84.62, with the 50% support at $72.97.
- The monthly relative performance broke through resistance (line a) in May 2011. By the end of September 2011 (line 1), the RS line was clearly positive.
- The monthly OBV was also positive. Volume surged on September 19, 2011, when MLNX showed up on a high volume scan.
- Both the RS and OBV analysis have stayed positive for the past year, though they will turn lower this month. They confirmed the highs, so a correction will be a buying opportunity, but it may last several months.
Lumber Liquidators (LL) is a $1.4 billion home-improvement company that has had a high so far in September of $54. This will be the third month that LL has closed above its monthly Starc+ band.
- There is initial support at the September low of $46.66, with the major 38.2% Fibonacci support at $38.62.
- The 50% support is at $33.76, which is very close to the 2010 high of $33.41. This should be the maximum downside for any correction.
- The monthly relative performance broke its downtrend (line d) in January, and it moved above its WMA the next month (line 2).
- Volume on February 22, 2012 was ten times the average, as the monthly on-balance volume (OBV) moved above its WMA.
- The monthly OBV and RS are positive, but are well above their WMAs, suggesting their overbought status.
- The weekly indicators have turned lower, but also confirmed the recent highs.
- Resistance now stands at $53 to $54, with the weekly Starc+ band at $56.30
SolarWinds (SWI) is a $4 billion software company whose September high at $60.95 came very close to the monthly Starc+ band. The chart appears to be forming a gravestone doji, which is consistent with an interim top.
- There is next support at $51.96, which was the August low, with further levels at $48.64, the high from early June.
- The 38.2% Fibonacci retracement support is at $45.16, with the 50% support at $40.29.
- The monthly technical studies turned positive in early 2011 (line 1), as the RS line broke through its resistance (line a).
- The monthly OBV also overcame the resistance (line c) that went back to 2009.
- Both the RS line and the OBV did confirm the highs, but have now turned lower. The weekly studies (not shown) also confirmed the recent highs.
- There is initial resistance now at $57, with the monthly Starc+ band for October at $62.
Cirrus Logic (CRUS) is a $2.4 billion specialized semiconductor company whose circuits are used not only for the audio but also the energy industry. CRUS spiked to a high of $45.34 in early September, but now looks ready to close lower for the month.
- There is next support at $35.54, which was the August low.
- The 38.2% retracement support is at $32.80, with the 50% support level at $28.90.
- At the end of January 2012, CRUS completed a tight seven-month trading range, closing strong at $20.43.
- The relative performance moved well above its WMA in early 2012, and surpassed major resistance (line e) at the end of April.
- The volume during the last two months of 2011 was low (see circle), but then it surged in 2012, which was a bullish setup.
- The monthly OBV moved above its WMA at the end of March.
- The weekly technical studies are declining, but did confirm the recent highs.
What it Means: The monthly analysis of these four top-performing stocks illustrate how well the longer-term charts can be used to spot major trend changes and help one stay with the long-term trends.
Those who have been long these stocks this year have tremendous profits, but should not be complacent. All four look vulnerable to a sharper correction in coming months. The confirmation of the highs by the OBV and RS analysis indicates that even a several-month correction will be followed by new highs.
However, as we saw with SPDR Gold Trust (GLD) in 2011, corrections that follow multiple closes above the monthly Starc+ band can last quite a few months.
How to Profit: No official recommendation, but I would suggest either selling calls against existing long positions on a move back toward or above the September high. Alternatively, take partial profits and/or use a stop under monthly support. Most importantly, have a plan.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.