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BALTIMORE (Stockpickr) -- A fix for Europe is starting the markets on a strong note this morning.
Europe has been a black eye for U.S. stocks in 2011 -- almost any news from the eurozone has unceremoniously shoved stock prices down the stairs. A debt deal, any debt deal, comes as a big relief to the investment community. What’s yet to be determined is whether a scalable solution can be figured out to apply to Greece’s similarly positioned PIIGS neighbors.
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In the meantime, that sentiment boost is helping to spark some significant technical trading setups in Wall Street’s biggest names. In case 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, technicals are 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, we take an in-depth look at large-cap stocks that are telling important technical stories. Here’s this week’s look at the technicals of five must-see stocks.
SPDR S&P 500 ETF
All eyes have been on the broad market in the last few weeks -- and the SPDR S&P 500 ETF (SPY) has been the most popular way to trade it. Last week, the ETF was threatening a breakout above long-term resistance, a move that it managed to pull of as strong corporate earnings helped to buoy sentiment for stocks.
Now, consolidation above that previous resistance level is providing a nice entry opportunity.
The throwback to that breakout level is actually a bullish sign for stocks, because it means that the market is showing enough demand above the 1225 level to sustain prices there. It’s likely that Europe’s good news will provide a solid thrust back off of that level today -- that’s a good opportunity to go long the market.
iShares Russell 2000 ETF
Despite high correlations that are tying the movements of most assets together, there’s still a clear aversion to the smaller, more speculative class of stocks. That’s best spotted in the iShares Russell 2000 ETF (IWM). When the S&P 500 was breaking through to new highs, the Russell was lagging. And the index is only now attempting to break out above the resistance levels that it set in the late summer.
$74 is the price level to watch in IWM; it’s the strongest resistance level that shares need to surpass in order to get back to a more bullish technical posture in 2011. 14-day RSI has been an early indicator of a bullish bias in this stock -- and the fact that it continues to track higher indicates that buyers remain in control of small stocks. That’s particularly important given momentum’s status as a leading indicator.
The nearest semblance of support in IWM right now is the 50-day moving average, which swept below shares earlier this month. With shares breaking out above $74 today, that’s where I’d be placing a protective stop.
Even if smaller names have been showing weakness lately, the big names have been making up for it with a show of considerable strength. Take McDonald’s (MCD), for example. This fast food giant has been performing especially well in 2011, delivering year-to-date gains of 20% on top of the firm’s 3% dividend yield. That excess relative strength is reason enough to put a name like McDonald’s on traders’ radar.
But the setup in shares of this firm is even more compelling. In the last couple of months, McDonald’s has been forming a bullish ascending triangle setup, a formation that’s characterized by a set horizontal resistance level (at $91) and uptrending support below. That ascending triangle broke out late last week -- but investors who missed out are getting a second chance at an entry.
As with SPY, the ideal entry for a stock that’s already broken out comes on a throwback down to that breakout level. Since McDonald’s has been consolidating just above $91, a thrust higher today is a solid entry signal. I’d recommend keeping a protective stop just below the 50-day moving average.
SPDR Gold Trust
Gold has been on a lot of investors’ minds recently, if only because its become so much less clear whether it still makes sense to buy this metal. Gold got hammered hard last month, falling from record highs in record time -- but the fall was helped along by Operation Twist and a Fed that’s more than happy to nudge assets in the direction of treasuries rather than gold.
But that’s changing. Gold has been showing signs of bottoming lately, breaking out above $165 this week. That move indicates that strength is starting to come back into gold. I think that it pays to be particularly tactical with a gold trade right now, but investors looking for a good place to build a position in the metal should be thinking about it now.
The bullishness that’s been mounting in the broad market in the past week or two will likely take at least some of the steam out of gold’s sails -- after all, risk is back “on” this week, and investors aren’t looking for an anti-stock trade. Traders hoping for a violent spike in gold prices should keep that factor in mind.
Another commodity name that’s been showing signs of a bottom is Vale (VALE), the $130 billion Brazilian miner. Vale hit a bottom earlier this month and has been tracking higher ever since -- a horizontal resistance level at $25 and higher lows make Vale another ascending triangle trade. It looks like that breakout is getting signaled this morning.
If you want to take the Vale trade, I’d recommend placing a protective stop just below this stock’s uptrending support line.
To see this week’s trades in action, check out the High Volume Technicals 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.