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3 Technical Setups for the Week - 44414 views
BALTIMORE (Stockpickr) -- The economic calendar continues to have a hold on the markets this week as earnings season continues on full-bore and considerable news gets digested by Wall Street.
This week, the typical key economic numbers such as manufacturing data, housing, commodity inventories and inflation metrics will continue to be in play. So too will Fed Chairman Bernanke’s testimony before Congress on Thursday morning (and other Fed presentations spread throughout the week).
But while uncertainty is still in the market right now, the technical outlook of the broad market still looks strong. The S&P 500 has gained nearly 6% year-to-date, and comparable indexes have rallied in kind. With multiyear highs in equities right now, several support levels acting as downside protection, there’s plenty of reason to expect continued heights for stocks.
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That’s why it’s such a crucial time to take a look at three promising new technical setups that could trigger trading this month.
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.
We’ll start this week’s setups off with one of the least complex charts (albeit with one of the most complex names), TIM Participacoes (TSU). TSU is one of Brazil’s largest wireless carriers, with a coverage footprint that reaches more than 84% of the country’s residents. The last year has been a fairly strong one for TSU, and shares are up around 29% in the trailing 12 months. Now, with a bullish technical setup at hand, shareholders could be in store for more of the same.
That’s because TSU’s previous gains have come in the form of a bullish channel up -- a situation in which the stock’s price movements have been banded by parallel trend line support and resistance levels at below and above its price action. With share prices pulling back to that lower support level right now, traders could find success in a bounce higher.
To play this trade, the best option is to actually wait for a bounce off of support, then go long. While waiting for the bounce to happen does mean that you’ll miss out on a small portion of the move higher, it also significantly reduces the risks of seeing this pattern break. Either way, consider placing a protective stop just below trendline support at $35.
According to Karvy Global, TSU has been one of the 10 best-performing emerging-markets stocks over the past month and is one of the 10 Brazilian stock picks for 2011. With a B buy rating, it's one of TheStreet Ratings' top-rated wireless stocks.
Lender Processing Services
Lender Processing Services (LPS) is a company that provides software and technology to the mortgage lending industry, a business that’s continued to be under pressure in the current environment. While shares have been trending lower lately, a potential reversal is in play for this stock right now.
That’s thanks to an inverse head-and-shoulders reversal pattern in shares of LPS. Unlike most “textbook” head-and-shoulders examples, the pattern forming in LPS is actually a complex head-and-shoulders, with two shoulders on each side of the stock’s inverted head. Despite the somewhat different appearance of this pattern, the key to its efficacy is its length. This pattern has been forming for months, a factor that suggests the resulting rally could be significant. $38 looks like a reasonable upside target for this trade right now.
The trade trigger for a head-and-shoulders setup is a break above the neckline, something that this stock managed to do by yesterday’s close. Now, traders will want to wait for confirmation of a move higher in today’s trading before going long. I’d recommend placing a stop just below the 200-day moving average right now -- it’s a price level that’s successfully acted as support in the past.
In the most-recent quarter, Daniel Loeb's Third Point initiated a 1.8 million-share position in LPS, which comprises 2.83% of the total portfolio.
Apparel retailer Aeropostale (ARO) has had a relatively volatile trading history of late, but a narrowing trading range bodes well for shares. Since September, Aeropostale has been forming a symmetrical triangle, a setup that potentially points to a reversal in this stock’s downtrend.
That said, traders with a stake in ARO will want to watch this pattern carefully. While the symmetrical triangle can act as a reversal setup, it can also be a continuation pattern -- and lead to another leg of lower prices. Essentially, it’s an if/then pattern. If shares break above the upper trendline, it’s time to go long; if they fall below the lower trendline, it’s best to bet against this stock.
Either way, wait for the actual break to occur -- anything less makes trading this stock a gamble.
In the most-recent reporting period, John Hussman at Hussman Econometrics Advisors maintained a 5.25 million-share position in Aeropostale, which comprises 2.04% of the total portfolio. Jeanine Poggi highlighted Aeropostale recently as one of 18 potential retail takeover candidates for 2011.
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.