Technician targets telecoms

For the more sophisticated trader, Michael Ashbaugh, editor of Marketwatch's The Technical Indicator, reivews the technical condition of the market following last week's decline.

And while he believes the drop inflicted "serious technical damage" to the general market, he still finds one sector -- telecom stocks -- showing favorable near-term strength.

As for the overall market, he explains, "When we assess the S&P 500, we look at the 20-day Bollinger bands. A break above or below the bands is statistically unusual, and consecutive breaks outside the bands are even more uncommon.

"Perhaps not surprisingly, the S&P closed way under its 20-day bands after Tuesday's bloodletting. And even with Wednesday's gains, the S&P notched a second consecutive close under the bands."

What does this mean looking ahead? Ashbaugh notes, "Technically speaking, a break under the bands suggests a tension between two time horizons. On a near-term basis, the breakdown suggests an index is oversold and due to bounce. It's edged outside the band that brackets two standard deviations of its 20-day volatility, and a reversion to the mean should be expected.

"Yet on a longer-term basis, the underlying sell pressure has been extreme, and will likely lead the markets lower. In the end, significant technical damage was inflicted on Tuesday, and this is a market to avoid near-term until better signs of a bottom are in place."

Meanwhile, he notes, "The telecom sector may be the best positioned sector after this week's losses. The group has two things working for it in the current market. To start, it remains within a strong uptrend, notching five-year highs as recently as last Monday."

Fundamentally, he adds, "The group also has defensive characteristics that help insulate it from broad-market downturns. The Telecom Index rallied from support Wednesday at the breakout point and the 50-day moving average."

Within the Telecom Index, the technical advisor sees four stocks that he believes appear well-positioned to rise over the near term: Citizens Communications (NYSE:CZN), Qwest Communications (NYSE:Q), Embarq Corp. (NYSE:EQ) and Sprint Nextel (NYSE:S).

Steven Halpern's TheStockAdvisors.com provides a free, daily overview of the latest stock ideas from the nation's leading financial newsletters.