Wall Street wisdom urges us to “buy low,” but oftentimes a low-priced stock is not cheap. Even a superstar such as Apple when it was trading down 26% from its high in 2012 was not done falling. In January 2013, it collapsed on its way to a total loss of 45%. Another old saw tells us that industry-group strength is more than half the reason any component stock within is also strong. The theory is that a strong group suggests enough business to go around to all involved. I cannot comment on that, but studies have shown that stocks in weak groups that try to rally are swimming upstream. One of my favorite trading strategies is to find stocks in strong industry groups that are starting to play catch up with their peers. Again, just because a stock was left behind does not mean it is ready or even able to run with the bulls. However, if it has already developed some of technical markers of a stock coming back to life, then we’ll have a great candidate. For example, earlier this year, department stores as a group were moving nicely higher, led by a May jump in Dillard’s DDS, -0.45% thanks to good earnings numbers. Nordstrom JWN, -0.56% also jumped in May on earnings, and Macys M, -0.11% was still in a rising trend following its earnings-induced jump last November. Yet perennial doorstop KohlsKSS, -1.03% was in a short-term decline (see chart below). Indeed, Kohls had been rangebound since 2009, so it was not much of a surprise to see it miss its peers’ rally. As the summer progressed, most department-store stocks held or added to their gains. Meanwhile, Kohls’ technicals started to change. Its price action remained weak, but momentum indicators such as the relative strength index (RSI) started to edge higher, as did cumulative, or on-balance, volume. Finally, on July 30, the stock rallied sharply on heavy volume to close above both its 50-day moving average and a trendline drawn from the April high. Good technicals manifested in good price action, and Kohls was ready. Of course, it helped that the broad market was about to embark on a strong August rally, but without its own improvements, Kohls would likely lag the market once again. JC Penney JCP, -0.46% had different, stock-specific issues keeping it down, but here, too, we can see improvements in its technical picture before it broke out to the upside in mid-August. Cumulative volume started to rise as early as June. It’s strong industry group went a long way toward building confidence buying the price breakout last month. Another recent example was Isis Pharmaceuticals ISIS, +2.16% which broke out on Aug. 26 with an 11% one-day rally (see chart below). Biotechnology was a clear leader in August, and most sector indexes were reaching all-time highs. Isis was still trading in the lower half of its 52-week range, but it sported rising momentum indicators and already held support at its 50-day moving average. A breakout through resistance from June and prior August highs would be the ticket for the bulls, and it happened with very heavy volume. The stock is now overbought in the short-term according to some indicators, so volatility is likely. However, the trend from May is up, and resistance has now turned into support, leaving it in rather good shape. I see a semiconductor stock now setting up in a similar manner. Cypress Semiconductor CY, +1.66% is also trading at about the middle of its 52-week range, but the benchmark PHLX Semiconductor Index SOX, +0.74% is near decade highs. Technology stocks in general may have lost a little of their mojo lately, but overall they have been leading the market for months, so it is safe to say that Cypress resides in a strong group. This stock has been in a short-term pause near resistance in a three-month consolidation pattern. I hesitate to call it a cup-with-handle pattern since it violates too many of that pattern’s rules. However, it does have the spirit of the pattern, the battle within the pattern leading to the bulls amassing forces at the border. Technically, it sports nicely rising cumulative volume, and it is trading above its two key moving averages. All that is needed is the actual breakout, and there would be little in its way to catching up to the group with a double-digit percentage gain. Cheap stocks are not always cheap. But stocks in strong groups that are building bases and improving their technicals are like tinder awaiting the spark of a breakout. Not only is there a nice gain possible, but the risk of buying at the top after a long rally rather low.Article