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- 4 Stocks Under $10 Moving Higher Into Breakout Territory
- 3 Breakout Financial Stocks Under $10 for Your Watch List
- 3 Tech Stocks Under $10 Triggering Breakout Trades
5 Big Stocks Ready to Slingshot Higher - views
BALTIMORE (Stockpickr) -- Yesterday, Fed Chairman Ben Bernanke used two of his most powerful weapons: allusion and ambiguity.
Investors had been watching the Fed’s actions closely -- after all, with the economy slowing, could we be getting the signal that the Fed is going to kick off QE3? If you ask me, it wasn’t likely. In fact, it wasn’t likely back in June either, when analysts seemed sure that QE3 was around the corner.
But rather than tip his hand, and show that another round of stimulus wasn’t coming, Bernanke opted to suggest, imply, and hint at the possibility that QE3 will be coming around the corner when and if it’s needed. You can’t blame the man for using the only tools he has right now – just don’t fall for the QE3 hype on the next go-around.
We don’t need QE3 to push stock prices higher right now. In fact, the market’s been moving up in a stealth rally since the start of June. Today, we’ll look to take advantage with a technical look at five huge 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, 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.five huge names
In spite of a gut punch in the form of earnings yesterday, Devon Energy (DVN) is finally starting to look up.
Investors have had a tough run in this stock in lately. In the last quarter, shares have fallen more than 16%, more than enough to scare off any potential buyers when the market is effectively flat over that same period. But I think the downtrend is coming to an end this summer.
That’s because Devon is currently forming an ascending triangle bottom, a pattern that’ made up of a horizontal resistance level above shares (just below $60 in DVN’s case) and uptrending support level above them. Essentially, as DVN bounces in between those two technical levels, it’s getting squeezed closer and closer to a breakout above resistance. When that happens, we’ve got our buy signal.
Momentum, measured by 14-day RSI in this case, also adds some evidence of reversal potential in DVN. While the momentum gauge had been in a downtrend since February, that downtrend broke and an uptrend started in late June. Since momentum is a leading indicator of price, that’s solid evidence for upside in DVN.
Still, don’t buy unless that $60 resistance level gets taken out.
Another reversal is shaping up in shares of EMC (EMC), which is currently forming a double bottom pattern, a setup that’s formed in a downtrending stock by two swing lows that hit a floor at nearly the same place. The breakout happens when shares can move above the high that separates those lows. For EMC, that happened last week.
Now, regular readers of this column know that lines on a chart do not a trade make. There’s no mysticism at work here. Instead, the breakout level is significant because it’s a price where there had been a glut of supply of EMC shares; enough of a glut of supply to reverse prices as recently as early July. A move above that price indicates that the supply has been absorbed by increasingly eager buyers, and one potential stumbling block for EMC’s price has been taken out.
After breaking out of the pattern, shares have been consolidating just above that breakout level, a price that’s now going to start acting as support for EMC. That combination of a recent breakout and nearby support gives investors a high-probability trade with limited risk right now. I’d recommend buying here with a protective stop right at the 200-day moving average.
As of the most recently reported period, EMC was one of Ken Fisher's top holdings.
Fine jewelry maker Tiffany (TIF) is forming nearly the exact same setup right now, only on a smaller scale. Like EMC, Tiffany had been in a downtrend, getting pushed more than 17% lower since the start of the year. But two swing lows at $50, separated by a high of $54, formed our double-bottom.
Since breaking out, TIF tested summer highs at $58, but they’ve since come back down to test newfound support at that $54 level. That’s a phenomenon known as a throwback. Throwbacks are actually a good thing because they give investors a second chance at a low-risk entry. With shares so close to support at $54 right now, a breakdown below that price signals a quick exit.
Tiffany’s double bottom doesn’t have the same immediate implications as the one in EMC. Smaller patterns have smaller upside targets, after all. But reversal patterns are significant in that they generally point to changes in the prevailing trend.
So if TIF starts on a prolonged uptrend from here, investors could be in store for considerably higher gains.
Tiffany also shows up on a recent list of 10 Profitable and Oversold Stocks Ready to Move Higher.
Heavy equipment maker Caterpillar (CAT) is in the same boat right now, albeit with a slightly different pattern to watch for. CAT is currently forming an inverse head-and-shoulders setup, a price pattern that’s identified by two swing lows at approximately the same level (like the double bottom), separated by a deeper swing low (called the head). The buy signal comes when the resistance level connecting all three lows (called the neckline) gets broken.
While this isn’t the most textbook pattern (the right shoulder is still in the early stages of forming, for instance) it’s still a strong setup right now. The inverse head and shoulders pattern indicates exhaustion among sellers, so logically, it’s the best time to be a buyer. CAT’s neckline is right at $87.50. If that price gets taken out, it’s a signal to take a position in CAT.
And 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.”
Last up is SunTrust Banks (STI), a $12.7 billion regional bank that’s forming a very similar setup to CAT right now, even if it doesn’t look that way at first glance. Unlike CAT, STI has been in an uptrend for most of 2012, rallying more than 33% since the first trading day of the year. But the pattern we’re watching -- the inverse head and shoulders -- is exactly the same here.
Too often, would-be traders focus too much attention on whether a setup is a reversal pattern (like the inverse head and shoulders generally is) -- and whether it could possibly show up near the top of a stock’s price action. STI’s chart is a good example of how it can. Ultimately, the lines technical analysts draw on charts are a way of mapping out important supply and demand levels for stocks.
For that reason, an inverse head and shoulders at the top of an uptrend has just as much upside potential as one at the bottom of a downtrend. Don’t get thrown off a good trade because it doesn’t look “textbook.”
The neckline level to watch in STI is $25. A breakout above that price is a buy signal.
SunTrust shows up on a list of 8 Post-Downgrade Bank Stock Bargains.
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.