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BALTIMORE (Stockpickr) -- Earnings season is the driving force for Mr. Market this week, as Wall Street gets pleasantly surprised by better-than-expected profit numbers. Investors came into this earnings season with horrible expectations – earnings estimates had been revised down significantly since March, to the point where Wall Street was expecting earnings to actually decline for the second quarter. So far, that hasn’t happened.
Instead, earnings have proven to be a solid catalyst for the orderly rally in the S&P 500 that’s been shaping up right under anxious investors’ noses.
This morning’s price action points to even more upside in the big index, a critical push higher as investors see whether the S&P can catch a bid as it tests the summer’s highs around 1375. As long as Europe stays quiet and earnings continue to surprise pessimists, this rally should continue to have legs this summer. Today, we’ll take a technical look at five big names that could benefit most from that momentum in stocks.
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.
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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 tough year for Cisco (CSCO) -- a series of missteps have sent the IP networking giant sliding more than 7.6% since the first trading day of 2012, a time when the rest of the S&P 500 has rallied 9%. But it looks like Cisco is finding bottom this summer.
Here’s how to trade it.
Right now, Cisco is forming a double bottom pattern, a setup that’s formed by two swing lows that occur around the same level. The buy signal comes when CSCO pushes above the swing high at $17.50 that separates the two bottoms. When that price level gets taken out, we have a strong sign that buyers have completely absorbed the selling pressure that caused prices to reverse at the start of July.
Momentum is another factor that’s pointing toward a reversal in CSCO. The downtrend that RSI had been in since March got broken earlier this summer, and it’s been in an uptrend ever since. Because momentum is a leading indicator of price, that newfound uptrend is a good thing for Cisco shareholders.
Cisco shows up on a June list of 5 Stocks for an Oversold Market.
Schlumberger (SLB) is another name that’s bottoming right now. Like Cisco, SLB has been in a downtrend for most of the year, sliding lower as oil prices fell from triple digits. But now crude prices are recovering, and so are expectations of SLB’s financial performance.
SLB has been forming an inverse head-and-shoulders pattern for the past few months, a setup that indicates exhaustion among sellers. Even though the inverse head-and-shoulders pattern in this stock isn’t as symmetrical as a textbook example would be, the buy signal still comes on a breakout above the $68 neckline. For SLB, that breakout came yesterday.
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.”
That bodes well for the breakout in SLB. Earnings are slated for tomorrow morning, complicating the trade with some big risk. I’d recommend holding off buying until tomorrow, after the market has absorbed that earnings news. Worst case, waiting will mean a few points of lost profits. If they send shares back down below $68, consider this setup broken.
Meanwhile, one stock that’s not bottoming right now is Marriott International (MAR), the $12 billion hotelier. Year-to-date, shares of Marriott have climbed more than 25.8%, leading plenty of investors to question whether it’s too late to buy this stock. The short answer is “no” -- you just have to know when to buy.
Marriott has been in an uptrend since it bottomed in October, and even though they’ve been consolidating sideways for the past few months, the rectangle pattern that shares have been forming gives buyers an easy-to-spot entry point. A rectangle is a consolidation channel that’s bounded by horizontal resistance to the upside, with horizontal support to the downside. More often than not, a rectangle is a continuation pattern; that means that it points to another leg of the rally for Marriott.
The best time to buy comes on a breakout above MAR’s $40 resistance level. Until that happens, I’d recommend sitting on the sidelines while MAR continues to trade sideways.
AT&T (T) is having a good year too -- shares of the communications giant have rallied more than 20% in 2012. More importantly, their rally has been orderly; it’s taken place within an uptrending channel that’s bounded by trend line support and resistance levels. While T has bounced around within the channel this year, it hasn’t exited it yet.
Right now, shares are in the upper half of the channel, coming close to a test of trendline resistance. If shares can shove above that level, it’s likely to lead to an acceleration of that uptrend -- and more gains for investors who own AT&T. But I’d recommend waiting for AT&T’s earnings to hit Wall Street before being a buyer.
Next week’s earnings call is actually a great catalyst for buyers to get into this stock: if earnings beat expectations, it’s likely we’ll see a break outside of the channel. Otherwise, if earnings disappoint, then a retracement to trend line support (right next to the 50-day moving average) is a likely outcome. If that happens, wait for a bounce off of support before buying.
I also featured AT&T recently in "5 Telecom Stocks Breaking Out Ahead of Earnings."
Last up today is Loews (L), a $16 billion holding company that’s involved in everything from energy to insurance to hotels. Loews has been forming an ascending triangle pattern for the past few months, creating a buying opportunity on a breakout above $41.50. We could easily see that happen this week.
$41.50 has actually been a critical resistance level for Loews for the last year and change -- shares have actually hit their head on that price level the last four times they attempted to move through it. From a technical standpoint that tells us that there’s a glut of supply of shares at $41.50; in other words, it’s a price level where sellers are more eager to sell than buyers are to buy. A breakout above $41.50 signifies that the glut of supply is no longer there, clearing the way for more upside in Loews.
When the breakout does happen, I’d recommend putting in a protective stop at the 200-day moving average.
To see this week’s trades 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.