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BALTIMORE (Stockpickr) -- What do taxes in Spain have to do with your portfolio this morning? More than you may think.
Spain is in the crosshairs this morning, after Prime Minister Mariano Rajoy announced 65 billion euros of spending cuts and tax hikes to try to calm anxious traders. Spain’s 10-year bonds have been flirting with 7% yields, a cost level that makes it nearly impossible for the Kingdom to keep up with its debt load. And if Spain can’t pay those bills, the eurozone (and anything with financial connections to it) could be in serious trouble.
That’s why the decisions being made in Madrid are impacting your stocks stateside this morning.
And this morning’s announcement is being absorbed favorably at this point. As I write this morning, the S&P 500 is pointed moderately higher. Of course, stocks were pointed higher on Tuesday morning too, before reversing lower for a 0.81% value haircut in the S&P by the closing bell.
Despite what may seem like tumultuous market conditions, stocks have actually been behaving pretty orderly this summer. While volatility has clearly increased in the last month (in spite of readings in the VIX Index), the bounce higher that started in June has been well defined and obedient to the technicals.
Right now, it looks like “up” is the likeliest direction for the S&P for the rest of the summer. Today, we’ll take a technical look at five big names that could benefit most from it.
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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, we take an in-depth look at big names that are telling important technical stories. Here's this week's look at the technicals of five high-volume stocks ready to move higher.
It’s been a good year for shareholders of $16 billion coating maker PPG Industries (PPG). Shares of the firm have rallied more than 22% so far in 2012, beating the broad market by a wide margin. But this stock’s owners could be in for even bigger gains this year thanks to an ascending triangle pattern that’s been forming in shares for the past two months.
Put simply, an ascending triangle is a pattern that’s formed by horizontal resistance to the upside and uptrending support below. As shares of PPG bounce in between those two price levels, they’re getting squeezed closer and closer to a breakout above that resistance level. When that breakout happens, that’s when you want to be a buyer.
For PPG, the resistance level to watch comes in at $107.50. Declining volume over the course of the pattern is a good thing. Ideally, we’ll want to see a volume spike on the push above $107.50. That will indicate that buyers are participating in the move.
It’s tempting to try to get into a setup like PPG early, but resist the urge; PPG isn’t a high-probability trade until $107.50 gets broken.
As of the most recently reported period, PPG was one of Ken Fisher's holdings.
A similar setup is shaping up in shares of Arena Pharmaceuticals (ARNA) -- it’s just a bit more exaggerated than the one in PPG. Arena has been getting a lot of attention in the last few months, in part because of just how crazy this stock’s ascent has been; shares are up more than 530% since the start of the year. So how do you squeeze more gains out of such an enormous rally? Have a look at the ascending triangle in shares:
Like PPG, ARNA is forming an ascending triangle with resistance at $12. The upside potential in ARNA’s pattern isn’t formed by magic or some kind of mystical geometry. In real terms, this pattern works because $12 is a place where there’s a glut of supply of shares of ARNA. In other words, it’s a place where sellers have historically more eager to sell and take (huge) gains than buyers are to buy. That’s why prices reversed on previous attempts at moving above $12. A move above $12 indicates that the glut of selling pressure has been completely absorbed by buyers, so without that upside barrier to price movement, ARNA can easily move higher.
That’s why it’s critical to wait for this stock to actually crack $12 before buying. Momentum, measured by the 14-day relative strength index, is still trending higher despite this stock’s massive moves so far this year. Since momentum is a leading indicator of price, that’s an especially good sign for this stock.
Obviously, ARNA is a high-risk trade. If you don’t want to stomach the volatility, stick with PPG.
The past few months have been less kind to owners of Schlumberger (SLB), the $87 billion oil service provider. Year-to-date, Schlumberger has slid around 5%, underperforming the S&P 500 by 11.6%. But that downward direction looks like it’s changing right now.
Schlumberger is forming an inverse head-and-shoulders pattern, a reversal setup that’s identified by three swing lows -- two at around the same level (the shoulders) that are separated by a deeper one (the head). The buy signal comes when the neckline, the resistance level connecting all three lows, gets broken. SLB’s neckline is currently at $68.
Lest 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.”
Neutral RSI gives this stock plenty of room to run without getting overextended.
Micron Technology (MU) is another stock that’s bottoming right now, it’s just a bit further along than Schlumberger. Micron had been in a sustained downtrend since the middle of March, but shares showed signs of bottoming this summer, forming an ascending triangle with resistance just above $6. That triangle broke out at the start of this month, with shares hitting their head on weaker resistance at $7 before turning lower.
But, believe it or not, that about-face for Micron is actually a good thing for investors.
That’s because it could potentially give investors a second chance at a low-risk entry in this stock. When a stock breaks out only to reverse and re-test its breakout level, it’s called a “throwback.” Throwbacks may seem negative on their surface (shares are moving lower, after all), but they’re actually positive because they reaffirm the stock’s ability to hold newfound support at what was previously a resistance level. And, it gives traders the opportunity to buy right at support.
To buy Micron here, it’s critical to wait for shares to actually bounce off of this $6 level. Ultimately, support levels do fail, and when they do you don’t want to be left holding the bag. Waiting for a bounce may cost you a couple of points, but it’ll indicate that MU can still catch a bid at support. Today looks like it’ll be that bounce day.
Last up today is Allergan (AGN), a stock that’s been locked in an uptrending channel since early October. Allergan is a bit unlike the other setups we’ve looked at today in that it’s not a breakout trade, it’s a range trade. But you basically want to trade this setup exactly like Micron this week.
That’s because, like Micron, Allergan is testing a support level right now. A trend channel is a big boon to traders because it gives us well defined risk/reward levels for any given entry – risk is the distance to support (where you’ll put your stop loss), and reward is the distance to resistance. Following that logic, the optimal entry point comes nearest to support, where risk is the smallest and reward is the biggest. That’s exactly where shares of Allergan are right now.
Just like with Micron, it’s crucial to wait for an actual bounce off of support before entering a Micron trade here – remember, the trend channel is no good if AGN plunges right through it. If you decide to be a buyer, I’d recommend a protective stop at the 200-day moving average.
I also featured Allergan recently in "5 Health Care Stocks Setting Up to Break Out."
To see this week’s trades in action, check out the Technical Setups for the Week portfolio on Stockpickr.
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.