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BALTIMORE (Stockpickr) -- Today is setting up to be a rough one for the markets. Stocks are already reeling from modest losses since the end of February that have been nominally small but possibly technically significant. The S&P 500 Index, which acts a good proxy for the broad stock market, has been in a definitive uptrend since thelow two years ago in March 2009, and while today’s price action doesn’t threaten that overall trend, it does definitively break the shorter-term uptrend that’s been in place since late 2010.
That’s not a concern in and of itself. Stocks saw a fairly large correction between April and September of last year, as the S&P retraced back to its long-term trend line. Because the rate of climb for the index has slowed considerably, though, the market’s current price action certainly warrants watching.
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Of course, a down day for the market doesn’t mean that you have to sit on the sidelines -- more than a few fortunes have been made on the short side of stocks as well. That’s why we’re looking at a new set of promising technical setups this 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.
While poor performance in stocks typically sends investors looking for returns in commodities, that’s not been the case for the last several weeks; in many cases, the best-performing resources are seriously underperforming stocks. For metal mining giant BHP Billiton (BHP), that’s been precisely the case. While this stock had been forming an ostensibly bullish setup for the last several months, a breakdown sends a very different signal right now.
Since the beginning of November, shares of BHP Billiton had been forming an ascending triangle, a pattern that’s normally thought of as a bullish formation. But just last week, shares broke below the pattern’s uptrending support line, a signal that the pattern no longer held water. A breakout to the downside is more than just a “no go” signal, however -- particularly in a lower market.
A downward breakout from a descending triangle signals a strong shorting opportunity for the stock, one that’s actually statistically more effective than the traditional upward breakout that would have bulls interested. If you’re interested in a short play on BHP, I’d suggest placing your protective stop just above the trend line at around $78.
As of the most-recent period, BHP showed up in the portfolio of Ken Fisher's Fisher Asset Management, comprising 1.6% of the total portfolio. It also showed up on a recent list of the 20 top-yielding metals and mining stocks.
While luxury good have been one of the biggest beneficiaries of the recent upticks in consumer spending, that also means that they stand to suffer the most in the face of another economic contraction. For that reason, it’s no surprise that investors tend to be more anxious about stocks such as Luxottica Group (LUX), the Milan-based purveyor of sunglasses and high-end prescription eyewear frames. Now, though, a technical setup stands to shake out some bulls.
Shares of Luxottica have been trading in a narrowing, uptrending channel, a setup known as a rising wedge in technical parlance. Despite this pattern’s somewhat bullish appearance (it’s in an uptrend, after all), this is actually a bearish setup that suggests a downside breakout is in store.
The statistics bear out just how consequential this setup actually is. Backtesting shows that this pattern leads to downside breaks approximately 90% of the time.
To trade the bearish signal, however, it’s crucial to wait for the break below the lower trend line. Wedges can continue to rise for some time, so to ensure the highest low-risk price at entry, shares need to actually make a confirmed break below the wedge. When shares do eventually fail, consider a stop loss around the 50-day moving average.
Luxottica showed up on a recent list of the top-yielding specialty retail stocks.
It’s important to remember that despite the somewhat ominous tone that the market’s taking short-term, there are potential upside setups to be had. Such is the case with defense contracting giant Lockheed Martin (LMT) right now. Following a large rally in shares this stock is consolidating in a tight range -- one that provides a solid “if/then scenario” for traders
If shares break above upside resistance, it’s time to buy shares. Otherwise, a break below support makes LMT another prospective short play. Either way, when a break does occur, the ideal stop-loss position is inside the channel around $80.
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.