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BALTIMORE (Stockpickr) -- You know something’s up when yesterday’s 0.39% decline in the S&P 500 is the biggest down day of the year.
The big index is already up more than 5.3% so far in 2013, delivering profits to stock investors at a pace that would pan out to 63% gains for the whole year if it was replicable. That enormous number should provide some much-needed context for a stock rally that many investors don’t have a lot of faith in. Make no mistake -- this rally is the real deal.
But so is the S&P 500’s overbought status right now.
The big index has moved too far too fast, it’s been consolidating sideways this week to counter that and bleed off some of that momentum extreme. Corrections are a normal part of any healthy rally -- and they can happen in either price or in time. So the sideways churn that stocks are currently performing (consolidating over time) is about as close to the ideal as it gets.
Just because the market is taking a breather this week doesn’t mean that you should be doing the same -- today, we’ll take a technical look at the price setups forming in five of the biggest names.
If you're new to technical analysis, here's the executive summary.
Technicals are a study of the market itself. Since the market is ultimately the only mechanism that determines a stock's price, technical analysis is a valuable tool even in the roughest of trading conditions. Technical charts are used every day by proprietary trading floors, Wall Street's biggest financial firms, and individual investors to get an edge on the market. And research shows that skilled technical traders can bank gains as much as 90% of the time.
Every week, I take an in-depth look at big names that are telling important technical stories. Here's this week's look at the charts of five high-volume stocks to trade for gains.
Wal-Mart (WMT) hasn’t had the best run in the last quarter. Over those trailing three months, the $233 billion retail giant has seen its shares slide around 7%. But that underperformance could be about to change thanks to the breakout that WMT just pulled off.
Just a couple weeks ago, Wal-Mart was looking outright bearish thanks to a descending triangle pattern that had been forming in shares. The descending triangle is a setup that’s formed by downtrending resistance above shares and a horizontal support level below them -- at $68 in WMT’s case. The sell (or short) signal comes on a move down through that support level. But Wal-Mart’s sell signal never triggered; instead, the firm pushed up through resistance, aborting the bearish setup in toto.
And an aborted bearish setup is often just as good as an outright bullish one. That change in trend for WMT indicates that now’s a good time to jump onboard this enormous name – if you pull the trigger on shares, I’d recommend keeping a protective stop just below support at $68.
Our second name today may look familiar to regular readers of this column -- I pointed it out back on Dec. 28.
Northeast Utilities (NU) has been forming an ascending triangle (the bullish inverse of the pattern that Wal-Mart broke out of) for the last few months, but shares only broke out late last week. The breakout wasn’t hugely surprising; $40 resistance was extremely well-defined, so a move through it was a pretty clear buy signal. Now, this stock is still in a buyable range.
With any technical pattern, it’s critical to think in terms of buyers and sellers -- not shapes. After all, triangles, wedges, and the like are a good way of describing what’s happening on a chart, but they’re not the reason why it’s tradable. Instead, that all comes down to the supply and demand caused by those buyers and sellers.
The horizontal resistance level at $40 was a place where a glut of sellers had been looking to unload shares. But the breakout indicates that increasingly eager buyers have absorbed all of the excess supply of shares sitting at that level. That makes higher ground a high probability trade in NU at this point.
Facebook (FB) is getting some serious post-earnings attention from investors this morning, and not for the right reasons. As I write, shares are down more than 6% early on Thursday following quarterly numbers that didn’t impress Wall Street yesterday. But believe it or not, Facebook isn’t the sole sell signal for this week (that comes later on).
Instead, Facebook is still looking fairly bullish from here -- even with today’s losses figured in. I’ve said before that I’m no fan of Facebook. There are scores of reasons why I don’t like the business. But the business isn’t the same as the stock, so I’ve also been bullish on shares since October.
$32.50 is a critical resistance level for the social network. It’s a place where sellers have been congregating to take gains for months now. Even if today’s price action adds another failure to Facebook’s attempts at the $32.50 level, shares are still within striking distance.
Just as importantly, an abundance of important support levels down below shares provide pockets of buying power at lower levels in this stock. Facebook is a perfect example of a stock that I would never buy -- but I’d sure trade it.
Another earnings name to watch today is Diageo (DEO), the $73 billion alcoholic beverage giant. The firm announced its earnings today, and it’s getting buying attention early in this morning’s trading session as a result. Of course, that may also have something to do with the bullish pattern that’s been shaping up in shares for the last seven months.
It doesn’t take an expert technical analyst to figure out what’s going on -- this chart is about as simple as it gets. There’s a glut of buyers sitting underneath that trend line support line in DEO. Those support and resistance levels give us a high probability range for this stock to trade within. And as you might expect, the ideal time to be a buyer is on a bounce off of support; that’s exactly what we may see today.
When you’re looking to buy a stock within a trend channel, buying after a bounce off of support makes sense for two big reasons: it’s the spot where shares have the furthest to move up before they hit resistance, and it’s the spot where the risk is the least (because shares have the least room to move lower before you know you’re wrong). Keep that in mind when putting in a stop loss in DEO.
I did say that there was one sell to watch today -- it’s Nokia (NOK), the beleaguered cellular handset maker. Shares of Nokia have performed extremely well in the last six months, climbing more than 88% as one of the market’s most hated stocks suddenly became less hated. But investors’ first instincts were probably right in NOK – and now, shares look “toppy.”
That’s because Nokia is in the early stages of forming a head and shoulders top, a pattern that indicates exhaustion among buyers. The head and shoulders is formed by two swing highs that top out around the same level (the shoulders), separated by a bigger peak called the head. A breakdown below the pattern’s support level, called the neckline, triggers the sell signal for this stock. While Nokia’s right shoulder hasn’t formed yet, I’d still be a seller on a move down below the stock’s $3.80 neckline.
And in case you think that the head and shoulders is too well known to be worth trading, the research suggests otherwise: a recent academic study conducted by the Federal Reserve Board of New York found that the results of 10,000 computer-simulated head-and-shoulders trades resulted in “profits [that] would have been both statistically and economically significant.”
To see this week’s trades in action, check out this week’s Must-See Charts portfolio on Stockpickr.
-- Written by Jonas Elmerraji in Baltimore.
At the time of publication, author had no positions in stocks mentioned.
Jonas Elmerraji, CMT, is a senior market analyst at Agora Financial in Baltimore and a contributor to TheStreet. Before that, he managed a portfolio of stocks for an investment advisory returned 15% in 2008. He has been featured in Forbes , Investor's Business Daily, and on CNBC.com. Jonas holds a degree in financial economics from UMBC and the Chartered Market Technician designation.