Recent trading certainly suggests that U.S. stocks are back on track. Two of the three major equity indices once again set all-time highs on Monday, while the Dow Jones Industrial Average sits less than four-tenths of a percentage point away.
But it’s not hard to believe that the market is on shakier ground than it has been during most of the recent rally.
The coronavirus from China still represents a significant risk. Valuations across the market look stretched. A contentious presidential election looms, and international macroeconomic growth remains relatively weak. Indeed, there’s no shortage of investors convinced that disaster — or at least a correction — is just around the corner.
Tuesday’s big stock charts focus on names that particularly need the market to avoid that correction. All three stocks have seen sideways trading of late and sit at key inflection points. In all three cases, near-term rallies suggest the potential for a breakout. Pullbacks, however, suggest potentially material downside.
Bausch Health (BHC)
Bausch Health (NYSE:BHC) touched a three-year high in December, as the former Valeant Pharmaceuticals continues its steady recovery. The fears of bankruptcy that sent shares to the single-digits in 2017 have faded, but the first of Tuesday’s stock charts shows the need for a bounce:
- BHC stock has established a textbook wedge pattern, as the stock’s trading range continues to narrow. A ‘golden cross’ established in November already has played out. An exit from a wedge generally leads to a significant move in the same direction. A downside move likely leads the stock back at least to key levels around $26, particularly as BHC exits a multi-month uptrend at the same time. A bounce, however, suggests upside, with trading over the past few months then resembling a (slightly) bullish flag pattern.
- The catalyst may well be Bausch’s fourth quarter earnings report, due on Feb. 19. Guidance for 2020 in particular will be closely watched. Bausch has raised its full-year outlook three times already this year; strong initial guidance plus hopes for similar outperformance could spike investor optimism. And with the company’s debt load still enormous — still nearly $24 billion, against a market capitalization just above $10 billion — even a little optimism can have a big impact on the stock price.
- Both technically and fundamentally, next week’s report should set the direction in BHC stock. The chart suggests the post-earnings move could accelerate in the initial direction. The outlook can either confirm the company’s turnaround and debt reduction plans, or raise fears that the debt load accumulated during the Valeant days is simply too large.
Booking Holdings (BKNG)
The near-term question for Booking Holdings (NASDAQ:BKNG) is obvious from the second of our big stock charts: will support hold? It’s a question that may have some relevance for the market as a whole:
- BKNG has been range-bound since September, with a multiple top above $2,050 and support holding at $1,850. But one potential concern: it certainly looks like volume has been high during selling periods. Trading was heavy both when BKNG fell from resistance to support after Q3 earnings in November and during last month’s coronavirus scare. A relatively high-volume rally earlier this month has faded quickly. There’s a bit of a cause for concern in those moves.
- Here, too, an earnings report represents a key catalyst, as Booking Holdings should report towards the end of this month. The broader fundamentals, however, do look attractive, with shares trading at less than 19x 2020 earnings per share estimates.
- But it might be the impact of the coronavirus on the global travel industry that determines in which direction BKNG heads from here. If the new virus from China can be contained, BKNG should hold support and rally nicely, particularly with a solid earnings report. If, however, the pandemic spreads, support breaks and there’s a potential path to May lows around $1,650.
Proofpoint (PFPT)
Once again, security provider Proofpoint (NASDAQ:PFPT) is trying to hold $130. Despite a sell-off after the company’s own earnings report on late January, the third of Tuesday’s big stock charts does lean bullish:
- PFPT stock already has filled the post-earnings gap down, admittedly on somewhat quiet volume. After that decline, shares also posted a nice, bullish bounce off moving averages which established a golden cross soon after. It does seem like there’s enough momentum here to finally retake $130.
- And “finally” would be the operative word. One reason for pause is that resistance has held around that level going all the way back to 2018. Despite the seeming secular headwinds behind the sector, other cybersecurity stocks have seen similar ceilings. Among them are industry leader Palo Alto Networks (NYSE:PANW) and widely-held FireEye (NASDAQ:FEYE).
- In that context, it’s possible resistance will hold. Even in a bullish market with strong performance from growth stocks, cybersecurity stocks, PFPT included, haven’t quite had their breakout. But that trading also suggests that when the breakout comes, it may be a big one. And the last of our big stock charts does suggest that a breakout might be coming.
As of this writing, Vince Martin has no positions in any securities mentioned.