Schaeffer's Tool Box: Aeropostale, Amazon.com, and American Superconductor

              

It may seem counterintuitive to go hunting for potentially bullish stock picks given the recent losses on Wall Street. However, given the right tools, bargain hunting in the current market environment could prove quite profitable. Enter today's Schaeffer's Tool Box filter: "Stocks showing heavy all-around investor skepticism." This particular stock screening filter is designed to highlight those equities outperforming the market amid a wealth of pessimism from the investing public - a combination that we have found to be indicative of continued upside potential for a security.

Unlike prior Schaeffer's Tool Box filter results that highlighted specific sectors, today's runs a gamut of groups from Internet, to retail, to semiconductors. Headlining today's listing is Amazon.com (AMZN: sentiment, chart, options), which just announced its new Kindle 2 e-book reader, followed by American Superconductor (AMSC: sentiment, chart, options) and Aeropostale (ARO: sentiment, chart, options). All 3 of these securities have attracted a wealth of bearish sentiment from investors and analysts, despite strong technical performances.

But, before we dive too deep into analyzing today's results, let's take a closer look at the filter criteria that spawned today's selection of potential bearish trading ideas:

• Heavy all-around investor skepticism
• A minimum stock price of $10 per share
• Minimum put & call open interest of 10,000 contracts
• Minimum average daily stock volume of 100,000
• Trading above their 20-day moving average
• Total analyst rankings greater than 10

If you haven't familiarized yourself with the Stock Screener on the Schaeffer's Quotes & Tools page, you might want to preface today's article by reading this primer on how to use this set of stock filtering tools.

The Sentiment Rundown

One of the keys to Expectational Analysis ^® is a wealth of either bullish or bearish investor sentiment that runs counter to the stock's technical performance. As you can see from the chart above, today's filter results have attracted a considerable degree of pessimism. Since I highlighted Tesoro Corp. (TSO) as a potential bullish pick in late January, I will be bypassing the oil concern in today's analysis.

Turning to the remaining candidates, American Superconductor rises above the rest in terms of sheer investor skepticism, with options trader piling into puts, short sellers holding more than 28% of the stock's float short, and 64% of analysts following the shares rating them a "hold." Still, the lack of "sell" ratings should raise a few flags for contrarians. Aeropostale faces a similar situation with analyst ratings, while Amazon.com is probably the least liked on Wall Street among the 3.

The overriding point is that all 3 of today's potentially bullish candidates have drawn considerable ire from analysts and investors alike. Since no clear-cut winner emerges from the sentiment analysis, let's get technical.

Getting Technical

With our sentiment drivers in place, we turn to technical performance. While all of our stocks are pre-screened to be underperformers, not all downtrends are created equal. As such, it is important to take a look at your filter results a bit more closely from a technical perspective to determine if the selections are in a well-defined decline. Below are the daily charts of AMSC, AMZN, and ARO.

American Superconductor (AMSC)

Aside from besting the SPX by more than 73% during the past 60 days on a relative-strength basis, the shares of American Superconductor (AMSC: sentiment, chart, options) have also rallied more than 10% so far in 2009. The majority of these gains have come in the past week, with AMSC finally breaking out of a trading range between the 15 and 17.50 levels. The shares opened near $17.50 per share this morning, but rebounded quickly from this formerly staunch resistance, indicating that the area may now provide key support for the shares.

That said, there is the matter of potential long-term resistance at the round-number 20 level. This region marked a floor for AMSC from September 2007 through September 2008, and is home to the stock's January 2004 peak. This area lies some 9% above the security's current trading range, so there is some room to run for those looking to take a chance on AMSC.

Amazon.com (AMZN)

On a year-to-date basis, Amazon.com (AMZN: sentiment, chart, options) has surged to a gain of more than 25%. In late January, AMZN gapped above former short-term resistance at the 58 level following a better-than-expected quarterly earnings report. A continuation of this buying strength sent the shares though long-term resistance at the 60 level. The shares appear to have established a new area of short-term support in the 62 area, site of prior resistance in October 2008 and home to AMZN's 10-day moving average.

With a heavy degree of pessimism levied against the shares, AMZN has a wealth of potential sideline money available that could help propel the stock further along its recent uptrend. The 70 level appears to be the next major technical hurdle for the security, which lies roughly 11% above the stock's current trading range near $63 per share. Bullish AMZN traders looking for an option play on the shares should consider a March or April 60 call to take advantage of continued positive price action. Traders might want to consider setting a stop-loss on a trade below the 60 level.

Aeropostale (ARO)

If you had told me yesterday that my Schaeffer's Tool Box pick of the week would be a trendy teen retailer, I would have thought you were crazy. Aeropostale (ARO: sentiment, chart, options), however, clearly has the right stuff to be a strong contender in any portfolio. Despite the legions of investors betting that the stock must soon fail, ARO shares have soldiered on, rallying more than 35% on a year-to-date basis. During this time frame, the security has enjoyed nearly unwavering support from its 10-day and 20-day moving averages. In fact, the latter of these trendlines even helped contain this week's heavy broad-market selling pressure.

Currently, the shares are in the process of rebounding from their 20-day moving average, while attempting to establish short-term support in the 22 area. ARO has already toppled formerly staunch resistance at the 21 level, and could utilize the 21-22 region as a springboard for additional gains. The next serious area of technical resistance for ARO lies in the 25-26 region, which is home to the stock's 20-month moving average. However, the shares would need to rally more than 18% just to do battle with this resistance. Traders looking to jump on the ARO bullish bandwagon might want to consider a March or April 20 call, while placing a stop-loss on a trade below the 20-21 area.

Remember, your risk tolerance may be different from my own, and I encourage you to expand on the research I've done here to arrive at your own conclusions. Personally, I usually look for an in-the-money, intermediate-term call position to take advantage of a potentially sharp rally in the shares. With an in-the-money pick 2 to 3 months out, you can help mitigate any potential market fluctuations that could impact your position.

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