Shares digital

In bear markets, the recovery often begins while the news seems to be getting worse.

Also, the future course of interest rates impacts sentiment in equities. If nothing else the market seeks to rapidly discount economically influential future expectations. When the market was riding high last summer, companies susceptible to a slowdown started to exhibit weakness. No sector was more affected than support services, down at worst some 31% since it peeked on 1 June last year, a move that resulted in the 50% retracement of the 2003-2007 bull market being heavily pressured. The logic presumably being that this sector would suffer more than most as belts were tightened. Another truism is that the market tends to overdo things, and the sell-off that transpired has seen many shares in this sector, particularly in recruitment, decline to what could well come seem bargain levels. Technical analysis means waiting to see the first shoots of buying before putting forward three stocks from this area that could be great recovery plays over coming months.

Michael Page (MPI)

BUY - 305p

TARGET - 410p

STOP LOSS - 275p

Having fallen by almost two-thirds since last summer, the shares have seemingly bottomed with a test but not a close of the gap (on the daily bar chart) that was opened up in early summer 2006, which marked the start of a long bull run. With this re-test and bullish momentum divergence present, the shares have started a saucering bottom formation that could also be interpreted as an inverse head and shoulders pattern. The upside break above the 50-day average has been followed by subsequent tests of support from the same line holding up. Last week’s further strength completed the pattern and points to gains toward 395p-410p, a level that generated support and resistance previously and currently coincident with the declining 200-day average. The 50% retracement of the recent decline also points to 410p as a possible target. Only a move and close back below 262p would really question this positive outlook.

OPD (OPD)

BUY - 171p

TARGET - 272p

STOP LOSS - 147p

Embroiled in a contested consolidation with Imprint that OPD looks set to lose, the recruiter’s shares seem to signal a possible recovery, having declined by 72% between last May and late January. As a precedent, between October 2000 and March 2003 they declined by over 90% then bounced by over 320% in the next four years. So this volatility has offered great opportunities. Rrecent events show momentum has been climbing in the face of the decline, exhibiting bullish divergence. The spike low in January has seen a bounce to test resistance from the bear trendline and coincident 50-day average and a move to try to retest support close to that first low. But last week, prices climbed and closed above the trendline following good volume, likely to have been buying. It seems a recovery at least to 227p, a level that has been influential previously, could well be on the cards now ahead of 272p in the medium term.

SThree (STHR)

BUY - 195p

TARGET - 272p

STOP LOSS - 186p

Return to go might describe the recruiter’s shares since they floated back in late 2005. In the interim they did rise by over one-and-a-half times. In many ways such stocks should not phase traders, seeming to spend most of their time in a clearly defined trending mode rather than a narrow range, so simple trend following methods can return excellent profits. The chart shows even trading just the 200-day average would have been worthwhile. Of late, having returned to the 200p area and though a low of 187p occurred in late January, bullish divergence between price action and momentum generated an upside pop that saw a bounce to 235p four weeks later. A bull channel has now developed, with the shares testing support from the channel base. In doing so the shares have approached their 2008 lows. But while 186p (on a close basis) is not seen, in the medium-term, a more genuine recovery is favoured toward 278p, an area of congestion, also the top of a gap opened on the daily high/low/close bar chart.