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3 Technical Setups for the Week - 8321 views
BALTIMORE (Stockpickr) -- Stocks continue to trade in a tight range this week, a positive sign for investors who’ve been fearing a selloff in stocks amid the rising oil prices of the past month.
That’s not to say that stock prices can’t stumble as we approach the end of the first quarter of 2011 -- only that bulls seem fairly intent thus far on holding onto their gains.
With futures flat this morning following a relatively standard day in the S&P 500 to kick off Monday, it doesn’t look like that balance of power between buyers and sellers has been tipped.
Of course, that same balance doesn’t necessarily hold true for the individual issues on the market. It’s important to remember that indices, like the S&P 500 and Dow, are only proxies for the broad market; while their movements may be indicative of what’s going on with most stocks, they smooth out anomalies from the large percentage moves that traders are targeting.
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All the more reason to take another look at three new technical setups for the week.
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’re stepping over to the Pink Sheets for our first potential trade of the week. One major misconception about pink sheets stocks is the idea that they're relegated to tiny, volatile penny stocks. While that may be true in many cases, the OTC Pink market is also home to a number of large, foreign stocks that opt to list on the Pink Sheets to avoid the hefty listing fees and expensive US-GAAP reporting requirements mandated on an exchange.
Case in point is Nissan Motor (NSANY), a large-cap Japanese automaker that happens to be listed on the OTC Pink market as well as the Tokyo Stock Exchange.
Shares of Nissan have been locked in an uptrending channel for the last several months -- a bullish sign for investors who are hoping to catch a bounce off of trend channel support. Right now, share are sitting right at support, leaving the door open for a move higher if Nissan can catalyze a bounce above the 50-day moving average. It’s really make-or-break time for this automaker, though; if buying pressure can’t keep shares in the channel, it’s likely we’ll see a sizable breakdown in this stock.
If you’re hoping to take the long side of Nissan, I’d strongly recommend waiting for a strong white candle in the stock’s chart. Once shares bounce above the 50-day moving average, you’ve got a fairly strong buy signal. Consider a protective stop just below $20.
Back on the NYSE, shares of electric utility Southern Company (SO) are presenting an interesting “if/then trade” for market participants right now. That’s thanks to a sideways consolidation channel that’s kept Southern in a relatively boring range since early November. A breakout of the channel sets up a buy or sell opportunity.
Simply put, a break above the channel’s upside resistance level signals a buy, while a crack below support signals a shorting opportunity. That said, the former looks like the more likely option right now, with shares holding above the 50-day moving average and presently absorbing some of the supply of shares right at resistance. With the even tighter trading of the last month, a volatility squeeze looks in play right now -- as volatility comes back into shares, a big move in one direction is likely.
As usual, however, the smart money won’t actually be taking the trade until a confirmed break above or below the consolidation channel actually takes place. Consider a stop just inside the channel after that happens.
Aluminum giant Alcoa (AA) is facing a strikingly different pattern right now -- one that could send shares considerably lower. That’s thanks to a bearish head-and-shoulders top that’s potentially forming in shares. The key to whether it is or not depends on the neckline; a break below the neckline triggers the head-and-shoulders, whereas a bounce off of the neckline tells traders that buyers overwhelmed the stock.
Remember, though, even though the head-and-shoulders is one of the most well-known technical patterns among would-be traders, it’s also among the most prone to falter on a test of the neckline. Don’t consider going short Alcoa until a confirmed break below $16. If that happens, a protective stop at $17 should protect against an unexpected fakeout in shares.
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.