2 Off-the-Radar Picks

As the market continues to recover from its recent pullback, MoneyShow's Tom Aspray goes shopping for lesser-known buy candidates in the next market-leading sector.

The stock market rally started to stall on Wednesday as the averages closed mixed, with the Dow Industrials down slightly and the Dow Transportation Average recording minor gains. The S&P 500 was also a bit lower, though the Nasdaq 100 was up on the day. The market internals were slightly positive on the day.

The technical outlook has improved sharply but it did favor a pullback as stronger resistance was being tested. The S&P futures are trading below Wednesday's lows as they are down ten points in early trading. A lower daily close will set the stage for a further decline that could carry over to early next week.

It is expected that the correction will be a buying opportunity in both the US and overseas ETFs, as well as individual stocks. Those stocks in sectors and industry groups that are doing better than the S&P 500 or Spyder Trust (SPY) should offer the best potential. The DJ US Construction & Materials Index (DJUSCN) is part of the industrial sector that has emerged as a market leader over the past two months.

These two relatively unknown stocks in this industry group look attractive for new purchase.

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Chart Analysis: DJ US Construction & Materials Index (DJUSCN) dropped to a low of 485 last week before rebounding sharply. Since the mid-December low, it is up 9.3% versus just a 2.6% gain in the Spyder Trust (SPY).

• The weekly chart shows that last week's low tested the support, line a, that goes back to the late-May highs.
  
• The next upside targets are in the 542 area with the weekly starc+ band at 546.90.
  
• There is longer-term support now in the 460 area, line b.
  
• The weekly relative performance moved above its WMA in December and broke its downtrend, line c, in early January.
  
• The RS line is now in a clear uptrend and the daily analysis (not shown) also looks strong.
  
• The weekly OBV also reversed back above its WMA this week after testing the breakout level at line e.
  
• The daily starc+ band is now being tested with initial support now in the 505-510 area.
  

Granite Construction (GVA) is a California-based heavy construction company that has a market cap of $1.3 billion and yields 1.60%. They report earnings on February 27.

• GVA bottomed in 2011 at $16.92 and has since been in the process of completing a major bottom as it peaked in 2007 at $74.62.
  
• The 20-week EMA at $32.67 was broken last week as GVA had a low of $31.39, line h.
  
• GVA is now back above the quarterly pivot at $32.96 with next weekly resistance in the $36 area, line g.
  
• The weekly starc+ band is at $37.74 with the quarterly projected pivot resistance at $39.85.
  
• The weekly relative performance has been trying to bottom since the spring of 2013 and has moved back above its WMA.
  
• A move in the RS line above the resistance at line i will confirm that GVA is a market leader.
  
• The weekly OBV has dropped below its WMA and is testing the uptrend, line j.
  
• The daily OBV (not shown) is rising and is back above its WMA.
  

NEXT PAGE: 1 More Construction Stock with Upside Potential

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Tutor Perini Corporation (TPC) is a $1.07 billion heavy construction company that is also based in California. They are scheduled to report earnings on February 20.

• TPC had a high of $26.37 in the middle of December before dropping over 20%.
  
• The weekly starc- band and support going back to 2011, line a, were tested on the decline.
  
• So far, TPC has held above the quarterly S2 support at $20.73 and weekly uptrend, line b.
  
• The relative performance did confirm the recent highs and has now pulled back to converging support at lines c and d.
  
• The weekly on-balance volume (OBV) did make a new high in December but dropped below its WMA in early January.
  
• The monthly OBV (not shown) is still holding well above its rising WMA and the daily OBV is close to turning positive.
  
• The monthly pivot resistance is at $23.74 with the quarterly pivot resistance at $24.27.
  
• The weekly starc+ band is at $29.72 with the 38.2% Fibonacci retracement resistance from the 2007 high of $72.21 at $33.11.
  

What It Means: The strength of the DJ US Construction & Materials Index (DJUSCN) over the past two months indicates it will be a market-leading industry group in 2014. This group is made up of not only heavy construction, but also general building materials, and the links will take you to Yahoo's list of the stocks in this group.

These two stocks appear to be in the process of completing major bottom formations, which give them tremendous upside potential.

How to Profit: For Granite Construction (GVA), go 50% long at $33.38 and 50% long at $32.76, with a stop at $31.13 (risk of approx. 5.8%).

For Tutor Perini Corporation (TPC), go 50% long at $22.13 and 50% long at $21.52, with a stop at $20.57 (risk of approx. 5.7%).

Editor's Note: If you'd like to learn more about technical analysis, attend Tom Aspray's workshop at The Trader's Expo New York, February 16-18, 2014. You can sign up here, it's free.