- Time to Sell These 5 'Toxic' Stocks
- 5 Earnings Short-Squeeze Plays
- 5 Must-See Charts
- 5 Stocks With Big Insider Buying
- 5 Hated Short-Squeeze Stocks Ready to Pop
5 Big Stocks Ready to Slingshot Higher - views
BALTIMORE (Stockpickr) -- It’s data Thursday today, but one set of economic announcements matters more than all the rest: the Fed’s rate decision this afternoon and Ben Bernanke’s press conference at 2:15 p.m.
Bernanke has been busy for the last several weeks, whispering sweet nothings about QE3 to all-too-excited market participants. The problem with those comments so far is that “sweet nothings” are exactly what the Fed has committed to.
Put another way, talk is cheap, but QE3 is expensive -- really expensive. To me, it’s not clear at this point whether Bernanke is seriously considering another aggressive round of quantitative easing, or if he’s politicking by merely hinting at it.
So far, anyway, the traditional data points don’t support pumping more money into the market. But after so many promises of another round of liquidity, Bernanke and company may find it’s time to pay the piper. Today’s announcements will reveal which is the case.
Meanwhile, stock investors haven’t exactly been hurting from a lack of a definitive QE3 announcement. So far, the S&P 500 has rallied 14.3% in 2012, making it a blockbuster year for stocks anyway you slice it. And with the big index still trading in its uptrending channel right now, there’s reason to believe that the buying isn’t over.
That’s why we’re taking a look at five stocks that look primed to slingshot higher from a technical standpoint.
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.
Monmouth Real Estate Investment
The first stock we’re looking at today, Monmouth Real Estate Investment (MNR), isn’t the biggest name on our list -- far from it. But this small-cap REIT has been getting a lot of attention from traders lately, and with a textbook pattern forming in shares right now, it’s worth taking a look.
Monmouth is currently forming an ascending triangle pattern, a setup that’s formed by a horizontal resistance level to the upside for shares and an uptrending support level below them. Basically, as MNR’s share price bounces in between those two technically significant levels, it’s getting squeezed closer and closer to a breakout above resistance at $11.70. That breakout is our buy signal .
The declining volume level over the course of the pattern is another factor that makes that setup textbook. Ideally, we’d want to see a volume spike appear when shares break out. That tells us that buyers are participating in the move.
A similar setup is shaping up in Caterpillar (CAT), even if it’s not as textbook right now. While ascending triangles are typically continuation setups that come into play during an uptrend (as with MNR), Caterpillar is forming an ascending triangle bottom, a triangle pattern that’s forming at the bottom of a downtrend. It’s a perfect example of the idea that the pattern itself isn’t as important as what’s actually causing it.
In real terms, it’s helpful to think about an ascending triangle pattern in terms of buyers and sellers. That $92.50 resistance level in CAT is a price above which there’s a glut of sellers -- they’ve absorbed any buying pressure at that price the past few times CAT has tried to move higher.
At the same time, the higher lows in the stock indicate that there is increasing buying pressure at lower levels. For that reason, it’s best to be a buyer when the stock moves above $92.50 -- that’s an indication that buyers are now more eager to buy CAT at a higher price than sellers are to sell. With selling pressure absorbed, the stock will have increased room to run.
Momentum has been in an uptrend for CAT since before the stock bottomed back in July. That adds some extra confidence over this setup since momentum is a leading indicator of price. As with MNR, it’s critical to wait for the breakout to happen in CAT before buying. That’s when it becomes a high-probability trade.
Caterpillar isn’t the only name that looks like it’s bottoming right now. A bottom of a different sort is coming into play for shares of $40 billion Japanese manufacturer Canon (CAJ) right now.
Canon is currently forming a double bottom setup, a pattern that’s formed by two swing lows that bottom at approximately the same price level. The peak that separates those two lows is the breakout level that signals the pattern is complete and it’s a good time to be a buyer again. For Canon, that price is a resistance range that tops out at $36. I’d recommend that conservative traders wait for that range to get exceeded with a print above $36 before putting their money on the line.
If you’re used to looking at price charts, you may notice that Canon looks more “gappy” than most. That is, there is a significant number of small price gaps on the chart. Those gaps, known as suspension gaps, are just caused by trading on the Tokyo Stock Exchange when U.S. markets are closed. For technical analysis purposes, trade this stock as if they weren’t there.
Microsoft (MSFT) is another double bottom trade to watch this week – just a sloppier one. The stock made two bottoms (one in June and one in July) before coming back up to test the pattern’s breakout level at $30.75. And since then, they’ve been trading right around that price level.
The fuzziness of MSFT’s resistance level at $30.75 makes getting confirmation critical. Clearly this stock can trade above $30.75 without actually triggering a breakout. For this trade, my preferred breakout signal is a push above $30.75 resistance followed by a second consecutive day that stays above it. Traders got that confirmed breakout signal last week following news that Microsoft was expanding its presence in China.
Since then, shares have settled back down to test newfound support at $30.75 (once broken, resistance becomes support for a 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.
If you want to take this Microsoft trade, I’d recommend waiting for shares to break $31.25 again before jumping in. MSFT is a notoriously sloppy chart, and it’s important to make sure any moves higher are material before putting your cash on the line.
Royal Dutch Shell
Last up is oil and gas giant Royal Dutch Shell (RDS.B). RDS is the longest-term of all of the stocks that we’re looking at today -- shares have been forming their pattern since the start of the year. But don’t forget: Long-term charts also have longer-term upside implications for traders.
RDS is forming an inverse head and shoulders pattern, a bullish setup that’s formed 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. Right now, shares are sitting just below RDS’ sloping neckline.
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.”
I’d recommend being a buyer RDS after shares push above that slanted blue line…
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.