This Pattern Has Been Working

Over the last couple of weeks we've started to see some rotation out of the defensive areas of the market and into some of the more underperforming areas of 2013. We talked about this briefly on CNBC Fast Money Tuesday, and first brought up the possibilities two weeks ago when Freeport wasn't breaking down. I still think that if the market is going to keep levitating without a major correction, this rotation needs to continue.

With that in mind, there's a certain pattern that seems to be working. I'm finding them mostly in resource names and technology (I doubt it's a coincidence that these are by far the two worst performing sectors for the year). The pattern is simple: An underperforming stock trading in between its 50 and 200 day moving average, with the 50 day obnoxiously lower than its 200 day. A bullish momentum divergence confirms to me that this is the pattern we're looking for.

This is what it looks like:

I'm finding them all over. And if this market is going to keep ripping, I think we're going to continue to see these types of names work. They're usually much more volatile, and also more hated than your average S&P name. But the upside is certainly there. This reversion to the mean trade has been working, and I think it still can. But risk management is more important than ever with these beat up stocks. So you can't get lazy.