6 Stock to Buy on a Dip

The market is now in extremely overbought territory, which is why I actually deployed a short today (DHI- a housing stock at the top of it's downward trend channel). It's seems like ages since I've shorted a stock, and believe it or not, I love shorting!

Along with my primary long watchlist, which consists of weaker support levels that are close to current price, I'm making a list of stocks to buy on deeper dips to stronger support levels.

Six stocks on this list (with entry points) include VDSI (36), CPLA (57), VIP (26), PCU (115), AAPL (150) and BRCM (37).

Chart: TOL

As noted in the previous post, I took a position in TOL today. Those familiar with my trading style know I don't tend to buy downtrending stocks. However, I noticed some mean looking divergences that lead me to believe their might be some institutional buying at the current levels. At the least, I'd expect a small bounce that's good for 2 points.

Take a look at the vertical box I placed on the chart. This area highlights the bottoming formation. Note that both RSI and OBV show positive divergence. Now compare volume in the vertical box to that in the horizontal box that highlights volume from March to July. Notice that during the downtrend, volume was typically higher on down days than up days. Now we are seeing the opposite volume trend. Volume is higher on up days.

While I've made a pretty good short term bullish argument, it's still tough trying to pick a bottom. The fact that we are talking about the housing sector, where negative news can come on a moments notice, only increases the degree of difficulty.

The great thing about this trade is we have a clear support zone at $20. If this zone is pierced, we'll likely see another leg down. By placing a stop under $20, I am only risking a little over $1.00. My target is the 50 day moving average, which makes my potential gain almost $3.00. This gives me an acceptable 3:1 reward to risk ratio.

The Housing Stock Conundrum: Analyzing TOL

Housing stocks have made a windfall for those bright minded speculators who have traded the obvious short entry signals over the past year (I am not in that prestigious group). While the trend is still negative, there are signs that we may see a bottom forming. Today I analyze Toll Brothers, one of the "go to" housing plays that has been on my short watchlist for what seems like ages.

First, let's dissect the weekly chart:



The first thing I always take note of is the major support and resistance levels. Here, we see support where the bottom seems to be forming, in the $22 range. Overhead resistance is in the $27-28 range. If I were to play the bounce, I would buy right now at support, and sell once the stock nears resistance. Also take note of the RSI and stochastic ranges. I would not buy at the top of the range.

Now let's move to the daily chart:

The first thing I notice on the daily chart is the "double bottom" that looks to be forming. Accompanying the double bottom is a positive volume pattern showing strong buying. This type of volume behavior is a must for buying a bottom.

While the double bottom pattern is a positive, TOL is a tough buy with the 50 day moving average looming under 2 points away. I would probably wait for a breakout over the moving average, with a target of $27-28.

It is clear that, in the near term, I am looking to play the long side of this stock. If I play the short side, it will only be on strength, using either the 50 day or price-by volume ranges as resistance. I will not short the current level.