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Taking a leaf out of the contrarian book, this week we try to lead the market in finding stocks that at least from a cursory standpoint might be deemed best avoided. Yet as the ‘Technical Talking Point of this week describes, the market invariably favours the brave – those prepared to step up to the challenge while it still appears to be one and yet, using technical analysis as a guide to the undercurrents present, it just might not be such a risk after all. One such sector which seems to be exhibiting the first shoots of recovery in the face of headline news that would suggest anything but to Joe Public, is the building suppliers. Perhaps the smart money has already begun to position itself and as always cannot help but leave its tell-tale footprints on the chart.

Travis Perkins (TPK)

BUY - £10.80

TARGET - £14.00

STOP LOSS - 908p

It’s obvious isn’t it? Housing seems to be in a tailspin so sell anything to do with the sector. But wait, last time around in the early 90s, when houses weren’t selling, it was DIY and property updating that benefited. Nevertheless the market has seen fit to wipe off over half the value of Travis Perkins’ market capitalisation in the last 12 months, taking the shares back to support from levels last seen at the bottom of the general bear market in early 2003. As a result, the price has even moved below significant historic support close to £11.85. Clearly this dramatic down move has been defined by the 50-day average which capped any upside yet last week, having made a spike low, the shares broke above the average with bullish momentum divergence clearly also evident. It seems probable that the market has overdone the downside and that bearish presumptions about the trading conditions for Travis Perkins will have been overdone. While the cautious might prefer to await a close back above £11.85 (say £12.20 for safety) the proximity of support offers the adventurous the chance of participating in a significant recovery play.

Grafton Group (GFTU)

BUY - €5.94

TARGET - €7.80

STOP LOSS - €5.40

The Anglo-Irish building supplies and DIY specialist has similarly suffered from market negativity over the last year, the decline in its share price has been more dramatic than Travis Perkins in percentage terms, with the shares dropping by over 65% in value, yet as the chart shows they remain some way above the lows that occurred around the time the bull market commenced in 2003. Indeed the decline appears to have terminated on a test of the less headlined 78.6% retracement of the 2003 to 2007 bull move, which came in at €4.91. Coincidently it produced some bullish momentum divergence and appears now to have completed a modest inverse head and shoulders pattern that targets gains toward €7.18 which is likely also to be close to the descending 200-day average, a line that has worked well for this share in determining the broad trend. Initially we would like to see a break and close above the bear trend line drawn off May highs by a move above €6.42. Looking further out gains would then focus on a re-test of congestion close to €7.80 (with Fibonacci retracement resistance at €7.78) and then €8.10.

SIG (SHI)

BUY - 861p

TARGET - £10.05

STOP LOSS - 830p

Having risen by a factor of almost nine and a half times between its 2003 low and its peak on July last year at £14.88, the shares have subsequently lost half their value in the last six months of 2007, bottoming out at 685p in mid-December and then re-testing that low again in mid-January. The proximity of these two lows and the fact that they were both accompanied by high volume is suggestive of a selling climax. Now a bull channel has possibly developed with the share price attacking resistance from both the channel return line and the bear trend line drawn off the July and September highs. Also evident is a symmetrical triangle pattern from which the recent upside breakout leads to the belief that gains will now target a move above £10.00. This would nicely equate to a rendezvous with previous congestion and the currently coincident 200-day moving average just above £10.00 and the possibility of £10.87 afterwards. Caution might suggest awaiting a move and close above the bear trend line, but the reward/risk ratio seems to favour the brave.