- 5 Earnings Short-Squeeze Plays
- Why to Buy These 5 Under-$10 Stocks ASAP
- 5 Active Under-$10 Stocks to Buy Now
- Hedge Funds Hate These 5 Energy Stocks -- Should You?
- 3 Big Stocks on Traders' Radars
5 Big Stocks Ready to Slingshot Higher - views
BALTIMORE (Stockpickr) -- What a week. From the Greek vote on Sunday to yesterday’s QE3 announcement (or the lack thereof), investors have been on pins and needles waiting for the next round of market-shaking news to come out before they make up their minds on what to do with stocks.
Of course, not all of this week’s decisions were curve balls. As I expected, QE3 isn’t coming after all. Instead, the Fed and Bernanke decided to kick the can a little further down the road by extending Operation Twist. With strategists from Goldman Sachs (GS) to SocGen (SCGLY) -- and their clients -- predicting a $600 billion round of quantitative easing, extending OT was pretty much the only move Bernanke could make in this scenario; not announcing anything at all would have torpedoed stock prices.
But make no mistake -- we’re not exactly in “make it or break it” mode for Mr. Market right now. In fact, it looks like the correction is coming to an end in the S&P 500. And that could cause one set of stocks to slingshot higher for the end of June.
Today, we’ll take a technical look at them.
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.
>>ACTIVE STOCK TRADERS: Check out Stockpickr’s special offer for Real Money, headlined by Jim Cramer, now!
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 rough quarter for Caterpillar (CAT). The heavy equipment maker is down more than 21% over the last three months, getting hit harder than most as the market corrected from its April highs. But there’s reason to believe in higher ground for shares of CAT.
The big setup to watch is the short-term ascending triangle bottom that’s currently forming in shares of CAT. Put simply, the ascending triangle is a pattern that’s identified by a horizontal resistance level to the upside (in CAT’s case, resistance comes in at $90), and uptrending support below shares. As CAT bounces in between those two technically significant price levels, it’s getting squeezed closer and closer to a breakout above that $90 resistance level. When it does, investors have a buy signal.
Momentum provides some extra evidence towards an upside breakout in CAT. 14-day RSI had been trending lower along with CAT’s price, but the downtrend in RSI broke last week as the momentum-gauge started making higher lows. Since momentum is a leading indicator of price, that’s a good sign for bulls.
Still, I wouldn’t recommend buying until that $90 resistance level gets taken out by bids.
Small-cap biopharmaceutical stock Amarin (AMRN) is showing traders a nearly identical pattern right now, only in the longer-term. Like CAT, AMRN’s price action has been bounded to the upside by a strong resistance level at $13 and uptrending support below shares.
So how exactly does this setup work in real-world terms? That $13 resistance level has acted as a sort of “ceiling” for shares because it’s a place where there’s a glut of supply for shares. In other words, it’s a price level where sellers are more eager to sell than buyers are to buy. Every time AMRN goes up to test resistance at $13, it absorbs a bit of that supply, but selling overwhelms the bids. The uptrending support level, though, tells us that buyers do have control of shares under that $13 level.
That’s what makes a breakout above $13 so significant. Once all of those eager sellers have been taken out of the stock (by increasingly eager buyers), then there’s no upside barrier to share prices for AMRN.
Amarin shows up on a recent list of Hot Biotech Stocks Traded by Hedge Funds.
Mid-cap communications stock Alcatel-Lucent (ALU) is a smaller name that’s been getting a lot of attention from traders lately -- and one that could be getting even more if the technicals pan out for this play.
Right now, ALU is forming a double bottom pattern, a reversal pattern that points to higher ground after the 30% selloff that shareholders have suffered in the last quarter. A double bottom is a setup that’s identified by two swing lows that occur roughly around the same level. A breakout above the intermediate peak that separates them is the buy signal for shares. In ALU’s case, that breakout signal is $1.70.
ALU gapped down back at the end of April, and it’s been forming its reversal pattern ever since. That’s supported by the statistics on gaps. Typically, gap downs are shortable in the near-term, but outperform the market over a longer timeframe.
A breakout above $1.70 gives us a signal that outperformance is set to start.
Tech behemoth Microsoft (MSFT) has been making news this week after the firm released details of its new tablet to the public. But we’re not looking at MSFT’s product pipeline for a potential trade in this stock. Instead, there’s a technical reason for taking a look at this $47 billion firm.
Right now, Microsoft is in the early stages of forming an inverse head and shoulders pattern. So far, the stock has formed its left shoulder and head, as shares retrace back to the neckline level at $32.50. From there, traders should be looking for a right shoulder to be formed before this pattern is complete.
Here again, momentum is hat-tipping the bullish setup in one of the stocks we’re watching. The downtrend in RSI broke at the start of June as momentum made higher lows.
The inverse head and shoulders indicates exhaustion among sellers, making it all the more significant for buyers to pay attention to. Lest you think that this pattern is less useful since it’s so well known, think again: an 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’s a good reason to keep an eye on MSFT in the next week or two as the pattern progresses.
Just don’t buy until it breaks out above $32.50.
Last up is Discovery Communications (DISCA), a $13 billion TV stock that’s making shareholders very happy in 2012. While the S&P is up 7.8% so far this year, Discovery has climbed more than 28% since the first trading day in January. Now this stock could be headed even higher. Here’s how you should trade it:
Discovery Communications has been stuck in an uptrending channel since November, bouncing in between a strong trend line support level and trend line resistance overhead. Trend line support is particularly important because it’s been tested seven times without fail since the channel started -- the more successful tests of support, the stronger the demand for shares along that trend line.
In an uptrending channel, the ideal time to be a buyer is on a bounce off of support. And with DISCA bouncing off of its support level at the end of last week, now looks like a good time to be a buyer in this stock. If you decide to be a buyer here, I’d recommend putting your stop loss just under trend line support. That way, if demand gets sapped from DISCA, you’re out of the trade immediately.
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.