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5 Big Stocks to Trade This Earnings Season - views
BALTIMORE (Stockpickr) -- Listen to the tone on Wall Street for a few minutes and it’s easy to forget that we’re still sitting on a 14% year for the S&P 500 right now.
Analysts are predicting a drop in profits this earnings season, the first since investors climbed out of the financial crisis. This isn’t a new thing -- since March, analysts have turned their earnings estimates lower for the whole broad market, underestimating actual earnings that have continued to move materially higher since the start of the year.
But earnings season has the effect of being a big reality check for investors -- and just as earnings beats have helped to fuel the rally that’s been shoving stocks higher since June, another quarter of Wall Street surprises should help to spur tradable moves in both directions. That’s why we’re keeping close tabs on what’s going on technically in the big-name stocks right now.
Today, I’ll show you five big stocks to trade for gains.
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, I take an in-depth look at big names that are telling important technical stories. Here's this week's look at the charts of five high-volume stocks to trade for gains.
First up is Enbridge (ENB), the $32 billion energy firm. ENB has been churning sideways for most of the year, delivering gains that only come in at half of what the S&P has produced since the first trading session in 2012. But Enbridge shareholders could be rewarded for their patience in the near-term thanks to the pattern that’s been setting up in this stock’s chart.
Enbridge is currently forming an ascending triangle, a bullish setup that’s formed by a horizontal resistance level above shares -- in this case at $41.50 -- and uptrending support below them. As ENB bounces in between those two technical price levels, it’s getting squeezed closer and closer to a breakout above resistance. That breakout is the buy signal.
The long-term setup that ENB has been setting has equally long-term trading implications. The fact that $41.50 has acted as such a strong barrier to upside (a fact gleaned from just how hard shares fell each of the last three times they approach it) means that a breakout has all the more significance.
Praxair (PX) is showing us a similar setup right now, just with a different lead-up. Shares of the $31 billion industrial gas supplier have been in a downtrend since late April, when the stock topped out and dropped hard. But the ascending triangle setup that’s been shaping up looks like a bottom for PX and a buying opportunity for traders.
Like the setup with ENB, Praxair’s ascending triangle has a horizontal resistance level and uptrending support. Resistance comes in at $109 -- that’s the price we’ll want to see a breakout above before a buy signal comes through for PX. It’s important to look at any technical pattern in real world terms; while calling this pattern a triangle is a good way of describing how it looks on a chart, the shape doesn’t have a whole lot more significance than that.
Instead, it’s valuable to think of this setup in terms of buyers and sellers. Basically, resistance is a price level where there’s a glut of selling pressure. Historically, that $109 resistance line has been a price above which sellers are more eager to sell and get out of this stock than buyers were to buy.
Even so, the uptrending support level does tell us that buyers are in control of PX at some level. When buyers build up enough steam to absorb all of those asks floating up around $109, the breakout happens and it makes sense to be a buyer.
Until then, it doesn’t.
Berkshire has become increasingly popular as a trade for both technical and fundamental investors ever since the split in B shares brought prices down into the double digits. While the price difference between the two classes is huge, an arbitrage mechanism means that both classes look the same from a technical standpoint: They’re both trending higher.
The uptrending channel in Berkshire is a buying opportunity, but it’s one that requires a little bit of patience right now. Shares have done a good job of participating in the rally that started this summer, and now near channel resistance, they’re starting to correct. As long as BRK’s shares stay within the channel, the correction is just that, not a signal to sell. The best time to buy a stock that’s in an uptrending channel comes at support -- it’s the place where shares have the furthest to move back up to resistance (the top of the channel) and where they have the least distance to move through support.
Since a breakdown below support means that the channel is broken, it’s a logical place to put a stop below. That means minimal risk. With Berkshire still around the channel’s midpoint, opportunistic buyers would be well advised to wait a little while before jumping in.
Another intermediate-term channel up can be seen in shares of payment network giant Visa (V). As with Berkshire Hathaway, shares of Visa have been trending higher since the start of the broad market rally this summer, and also like Berkshire, they’ve been bouncing within a predictable channel. The biggest difference is that this stock is closer to support.
Momentum adds some extra confidence to this setup -- Visa’s RSI line has been trending higher since all the way back in May, and the uptrend is still intact now that shares are correcting in early October. Since momentum is a leading indicator of price, the fact that the uptrend is still intact is a good sign.
If you’re looking for a chance to buy Visa (or Berkshire, for that matter), it’s important to wait until shares bounce up off of support rather than just waiting for this stock to get near it. That’s because all trend lines eventually 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 in missed profits, but it tells you definitively that this stock can catch a bid before you put your money on the line.
The sole bearish setup we’re looking at today is Coca Cola (KO). Yes, Coke has been trending higher for all of 2012, but along the way it’s been forming a well known reversal pattern: the head and shoulders. Essentially, the head and shoulders pattern is formed by three swing highs in a stock. The outside two, the shoulders, come in at approximately the same level, and they’re separated by the head, a higher peak in the pattern.
The head and shoulders indicates exhaustion among buyers, and tends to be a very reliable setup in spite of (or maybe because of) its popularity: 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 doesn’t mean that Coca Cola is going straight down from here. The pattern’s trigger is a move through its neckline, the trend line that’s connected the bottom of the pattern. Until the neckline gets broken, Coke’s uptrend remains in force. If a break does happen, I’d recommend shorts keep a tight stop just above the right shoulder; next week’s earnings could be the catalyst for the move.
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.