While going over my weekend screens, I noticed that many stocks are putting in tight patterns on their Weekly charts and could be building new bases. Tightness in chart patterns is positive because it often shows a sign of institutional support. Examples include: $AMP $CHKP $HES $HANS $CL $ROST $JCI. I’m not recommending buying these stocks now because you should never buy at the bottom of a potentially new base. I would rather wait and see if these stocks prove themselves by properly building the right side of their bases. If this happens, it would give me more confidence that the market is healthy.

In addition, when looking to re-enter the market after a correction, I prefer to “test the waters” with stocks looking like they could breakout soon rather than the ones that are still building their bases. For example, if the market resumes its uptrend over the next few weeks, I suggest taking light positions in the stocks that held up well during this pullback. If they don’t work out, at least you exposed your portfolio to the best stocks the market has to offer and you can always stop yourself out with a small loss. If the stocks work out well and show you a profit, then you can add to your positions or buy the other stocks that should setup after them.

Over this past week, I took light positions in the following stocks:

1) $GMCR: Although GMCR has been a huge winner since I recommended it in March 2009, I feel this stock has more upside potential. Their earnings and sales continue to accelerate and a very sharp analyst I know said he’s expecting them to raise guidance if/when the $DDRX buyout occurs. In addition, I feel they will get added to the S&P 500 soon, they could announce new deals with other coffee vendors, and the stock’s large short interest will continue to push the stock higher.

2) $ISRG: Fundamentally, their earnings and sales continue to accelerate. Technically, the stock has held its 10-week moving average since July 2009, a sign of strong institutional support.

3) $NETL: On Feb 2nd, this telecom semiconductor company beat earnings estimates and raised guidance. Positive analyst comments about NetLogic include the company’s significant design wins, their strong organic growth, and that they should benefit from the 3G buildouts continuing in India and China. They present Thursday, Feb 18th at the Oppenheimer Semiconductor Summit.

4) $DNDN: The company’s new prostate cancer drug Provenge is up for FDA approval in May. This blockbuster drug could potentially generate annual sales of $1.2 to $2.5 billion. One note about biotech stocks, I prefer to use options 3-6 months out to limit or quantify my downside risk. For example, if you own 1,000 shares at $31 and the stock hypothetically gaps down to $5 on horrible news, you lose $26,000. If you own 10 May 31 Calls at $5 and the stock gaps down, you only lose $5,000. If you don’t understand this or don’t trade options, please don’t worry about this because there are plenty of other stocks to trade. If you want to own shares, please keep your position size small to limit potential downside.

Other stocks on my watch list include: $CAGC $IPXL $BEXP $AAPL $VECO $NFLX.

I want to reiterate: I AM NOT SAYING THIS RECENT CORRECTION IS OVER! I am simply saying that some constructive signs are allowing me to shift my stance from a cautious mode to a neutral one. I suggest keeping a watch list of strong stocks that have held up well during this correction and being ready to pounce if the uptrend resumes in the next few weeks.

Please keep in mind that the purpose of this blog is to help people with idea generation. If you trade some of these stocks, PLEASE, PLEASE, PLEASE use stops. In other words, if some of these stocks turn against you and the market doesn’t cooperate…protect your portfolio! Thank you. Good luck trading!

I will be at the TradersEXPO in New York City this week from Feb 14-17th. Please send me a message if you plan to be there. I’m always happy to connect with and meet new traders.

Follow me on Twitter @jfahmy