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3 New Technical Setups With Gain Potential - 9443 views
BALTIMORE (Stockpickr) -- With investor uncertainty still registering high, it’s time to take another technical look at stocks with gain potential this week.
While the risk of a sustained downtrend looked fairly ominous just a week ago, the bounce that was put in on the S&P 500 last Thursday looks to have been at least an intermediate bottom. The market has already retraced more than 50% of its downside move thanks to strong buying activity over the last three trading days, a sign that we’ve now added a significant support level in the area of 1,250.
Despite the fact that the fundamentals aren’t particularly rosy right now, they’re ultimately being ignored by investors at the moment. That could be a good sign of things to come even as individual investors’ confidence in the most recent rally is waning. To make the most of this bewildering market, it’s time to turn to the technicals.
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Remember, technical analysis is a way for investors to quantify qualitative factors, such as investor psychology, based on a stock's chart patterns and trends. Once the domain of cloistered trading teams on Wall Street, technicals can help top traders make consistently profitable trades and can aid fundamental investors in better planning their stock execution.
Here's a look at this week's potential trades.
2011 is already turning out to be a strong year for shares of restaurant chain Brinker International (EAT). The company, whose roster of restaurant brands includes Chili’s and Maggianos, has already seen its shares rally more than 16% this year. And the stock’s current technicals suggest that even higher ground could be to come.
Right now, shares of Brinker are sitting in a channel up, a setup that’s essentially a pair of upward sloping trend lines that act as a sort of price ceiling and price floor for shares of the company. That stocks move in trends is one of the most fundamental precepts of technical analysis, and in Brinker’s case, the stock’s support and resistance trend lines provide us with attainable, well defined expectations over the stock’s price behavior.
With share prices sitting right at trend line support , we’re looking at a potentially ideal entry point for shares of EAT. Whenever dealing with a channel up, it’s best to wait for the bounce higher as shares hit their downside barrier -- we saw that yesterday. If you decide to take the long-side trade on this stock, remember to keep a tight protective stop should the formation fail. I’d suggest placing one around $22.50.
Shares of AmBev (ABV) could well be headed in the opposite direction thanks to an ostensibly bearish price formation. Even though AmBev shareholders have been enjoying a strong run for the last several months, a complex head-and-shoulders top is forming in this brewer’s stock chart -- something that isn’t marred by the stock split that took place in December.
Because technicals rely on share prices to aid in the study of supply and demand for a stock, it stands to reason that something that effects price -- such as a split -- would have a dramatic effect on a stock’s technical outlook. In reality, though, split adjusted prices are every bit as relevant for the stock’s price action as pre-split prices since the people controlling shares now have a cost-basis that’s adjusted for the split. Don’t get caught up on nominal prices; for technicians little changes following a split.
At present, AmBev is forming a complex head-and-shoulders pattern, a formation that’s marked by multiple smaller peaks (shoulders) on either side of a larger peak (head). Traders will want to watch out for a break below neckline for the sell signal to trigger. Be vigilant, though; a continuation of the market’s broad-based rally could kill this setup before it has a chance to trigger.
$12.8 billion IT giant Citrix Systems (CTXS) is showing us a potentially bullish setup today in an ascending triangle. Simply put, the ascending triangle is characterized by a horizontal resistance level to the upside and uptrending support down below. As shares get squeezed against that upside resistance level by the uptrend, the possibility for an upward breakout becomes stronger. It’s the breakout itself that becomes the “buy trigger” for this setup.
It’s important to keep in mind that while an ascending triangle is normally thought of as a bullish setup, there’s only a small amount of directional bias as the pattern is being formed. In other words, historical statistics on this formation tell us that a failure of this bullish pattern can often be every bit as good of a bearish signal as the traditional entry point is bullish.
For that reason, it’s crucial to wait for the actual breakout before becoming a buyer.
To see these plays in action, check out the Technical Setups for the Week portfolio on Stockpickr.
-- Written by Jonas Elmerraji in Baltimore.
At the time of publication, author had no positions in stocks mentioned.
Jonas Elmerraji, based out of Baltimore, is the editor and portfolio manager of the Rhino Stock Report, a free investment advisory that returned 15% in 2008. He is a contributor to numerous financial outlets, including Forbes and Investopedia, and has been featured in Investor's Business Daily, in Consumer's Digest and on MSNBC.com.