'Buy the Dip' On These 6 Stocks?

The best "buy" signal since 2016 has been the Bollinger Band breach, as Schaeffer's Senior Quantitative Analyst Rocky White noted in a recent comparison of eight trading indicators. Against this backdrop, Schaeffer's Senior Trading Analyst Bryan Sapp weighed in on six stocks that recently broke below their lower Bollinger Band -- and explained why this indicator alone shouldn't trigger "blind" buy-the-dip trades.

CAR On the Watch List

In the past year, stocks that broke below their lower Bollinger Band went on to average a one-month return of 2.92%, and were positive about two-thirds of the time, according to White. Car rental concern Avis Budget Group Inc. (NASDAQ:CAR) recently breached its lower Bollinger Band, and Tuesday's lows coincided with Friday's to the penny, almost forming a bullish engulfing candle. And while the stock remains below its 200-day moving average, "you can make a good sentiment case for it," Sapp argues.

On the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), the stock's 10-day put/call volume ratio of 9.74 is higher than 83% of all other readings from the past year, indicating options buyers have been more put-heavy than usual during the past two weeks. Likewise, short interest accounts for nearly 22% of CAR's total available float, representing more than two weeks' worth of pent-up buying demand, at the stock's average pace of trading. This skepticism points to sideline cash that could push CAR higher. All things considered, "A break above the $35 level would get me interested on the long side," he said.

Stars Align for FCX

Mining concern Freeport-McMoRan Inc (NYSE:FCX) also broke below its lower Bollinger Band recently, presenting an opportunity for longs. "The $14 area served as resistance in early 2016, and could now provide support for FCX," according to Sapp. And as with CAR, FCX remains surrounded by skepticism, even though the stock has rocketed more than 90% higher in the past year.

Just four out of 16 analysts offer up "buy" or better endorsements, leaving the door wide open for upgrades in the wake of a rebound. Likewise, the stock's 10-day put/call volume ratio on the ISE, CBOE, and PHLX sits at 1.68 -- in the 98th percentile of its annual range, suggesting there are plenty of options bears that could capitulate.

Blindly Buying Is 'Suicidal'

Meanwhile, insurance issue American International Group Inc (NYSE:AIG) and automaker Tata Motors Limited (ADR) (NYSE:TTM) recently broke and retook their lower Bollinger Bands, though Sapp warns that from an Expectational Analysis standpoint, "there isn't too much to get excited about." In similar fashion, mortgage issue PHH Corporation (NYSE:PHH) and dairy concern Dean Foods Co (NYSE:DF) broke their lower Bollinger Bands recently, and though sentiment is "awful" toward the duo -- appealing for contrarian investors -- and the two "could rally sharply, I'd at least want to see some sort of bottoming action before going long," Sapp said.  

In conclusion, "blindly buying a lower Bollinger Band break is suicidal," Sapp warns, unless the sentiment and technical backdrop are supportive. If the stock "at least showed some sort of bounce or near-term support," a long position would be more justified "because you can at least define your risk -- i.e., a break back below the lows of the day when the stock took out its lower Bollinger Band would be a sign to get out."

Don't miss Schaeffer's free weekly stock market forecast. Sign up now for Monday Morning Outlook.