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BALTIMORE (Stockpickr) -- What’s Mr. Market got in store for this “Data Thursday?” Not much, apparently.
Stocks are opening relatively flat this morning, despite the normal Thursday data dump of jobs numbers, consumer comfort stats and Fed balance sheet data that’s hitting Wall Street. For most market participants, another flat day is just more of the same, as distractions abound in stocks right now.
One of those major distractions is Facebook, the social networking giant that filed IPO papers yesterday. Facebook’s potential $10 billion offering would make it the biggest going-public transaction for an internet stock -- ever.
And with the firm’s financials public for the first time, analysts are poring over the numbers with baited breath. There are plenty of reasons to sit on the sidelines for a Facebook IPO; the valuations we’re seeing in social media and the post-IPO performance of the firm’s peers in 2011 are two of the biggest red flags.
Meanwhile, there’s still a market out there -- and technical trades to be made on some of Wall Street’s biggest 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.
Every week, we take an in-depth look at large-cap stocks that are telling important technical stories. Here's this week's look at the technicals of five must-see stocks.
It’s been a good year for shareholders of tech giant IBM (IBM): In the last 12 months, this $227 billion enterprise IT firm has seen its price rally more than 20% while the broad market struggled to keep its head above water. Since then, shares have been consolidating in a range between $177.50 and $194.50. With shares testing resistance this week, an if/then setup could have upside potential in this stock.
Initially, the setup in IBM was looking bearish biased thanks to a head and shoulders top that started forming in shares. But the pattern never broke its neckline, and eventually developed into a more balanced horizontal channel. Like most other horizontal channels, the if/then setup in shares works like this:
If shares break out above $194.50 resistance, then buy. If shares break down below $177.50 support, then IBM is a short candidate. Clearly, the upside possibility looks more likely right, but it’s not a high probability trade until the breakout actually occurs.
Either way it progresses, I’d recommend placing a protective stop back just within the channel.
For a blast from the past, let's turn to Apple (AAPL). With Apple’s record-breaking earnings during the last full week of January and its ascension to the world’s most valuable company (definitively, this time), this stock has had plenty of eyes on it in the last several trading sessions. We took a close technical look at Apple back on Jan. 12, paying particular attention to a potential breakout above the $420 to $425 range.
More important, I mentioned at the time that, “A breakout in Apple is significant because it wouldn't just be the penetration of a tough resistance level -- it's also a breakout to all-time highs, a scenario that adds a psychological edge to buyers.”
So what’s happened since then? Well, Apple certainly broke out above $435. Shares pushed above that price level the week before earnings, only to gap dramatically higher after the firm’s fiscal first quarter earnings call. All told, if you’d bought the pre-earnings breakout, you’d be up around 7.4%. Now, though, the question is where this stock goes from here.
The push to new all-time highs is still an important psychological catalyst for upside in shares. So is the minor breakout that Apple made earlier this week, pushing above its post-gap consolidation range. From a technical analysis standpoint, Apple continues to look particularly strong -- and I think it’s equally attractive from a fundamental perspective as well right now.
Investors shouldn’t let Apple’s sheer size scare them away from an attractive trade.
Bank of America
Speaking of size, Bank of America (BAC) is another stock that’s had plenty of eyes on it in recent months because of its scale. The firm is the world’s largest wealth management firm and the world’s largest mortgage servicer, also laying claim to more than 12% of all bank deposits in the U.S.
And let’s be frank -- most market watchers have been dead wrong about this firm’s prospects in 2012. While financial sector bears have been out in force this year, BofA has rallied more than 32%, making it one of the 5 Best-Performing Dow Stocks for 2012.
And there’s more upside potential in shares.
Much of the upside in BofA this year has been built off of a double bottom in shares that triggered right at the beginning of the new year. A reversal pattern, the double bottom put a bullish tenor to this stock and cleared the way to the next-highest resistance level at $7.50. With shares testing that $7.50 resistance level this week, another breakout could shove shares dramatically higher.
Remember, resistance levels are significant because they’re price levels above which there’s a glut of supply for shares of Bank of America. Put more simply, $7.50 is a price above which sellers are more inclined to take gains than buyers are to continue buying. That supply/demand imbalance absorbs any buying pressure buyers are bringing, then reverses shares lower again.
A push above $7.50 would provide traders with a strong signal to buy.
For more on Bank of America, the stock shows up on recent lists of 5 Bank Stock Value Plays and 10 Financial Stocks With Double-Digit Gains in 2012.
Citigroup (C) is another big-four bank that traders are paying attention to this week. While the firm hasn’t met Bank of America’s massive upside in 2012 (shares of Citi are up 20% year-to-date, enough for it to also make the double-digit gains list but still short of BofA’s rally), the technicals are pointing to additional upside in this stock.
Right now, shares of Citi are forming an ascending triangle, a bullish setup that’s identified by a horizontal resistance level above shares and uptrending support below them. As share prices for Citi bounce in between those two technically relevant levels, they’re getting squeezed closer and closer to a breakout above that $32 resistance level. A push above that price would be a solid buy signal for traders.
It’s worth noting that Citi has a sort of secondary resistance at $34 (the dashed line), a price that acted as a ceiling back in late October. While there’s potential for a glut of supply above that price, buying pressure has been building lately, and bids could absorb any lingering asks at $34. The fact that there’s only one touch of that resistance level means that it’s a less significant price barrier than $32 is right now.
Power management company Eaton (ETN) is a stock that’s showing traders a fairly similar setup to Citi right now. Like the big bank, Eaton formed an ascending triangle pattern in the fourth quarter of 2011, with resistance at $47 and uptrending support adding buying bias to shares. ETN broke out back at the start of January, triggering a buy signal for traders, only to fall back down to that $47 level in the middle of last month.
So should you stay away from this stock?
Not quite. Eaton’s return to newfound support at $47 (a move called a throwback) is actually a good thing in this situation. That’s because it confirms the validity of support at that $47 former resistance level. Since we know that there’s a glut of demand for shares of ETN below that price, traders have an opportunity to make a low-risk entry in shares of this stock as it bounces back higher this week.
Statistically, we know that stocks that throw back ultimately produce smaller gains than those that break out and never look back. Even so, investors shouldn’t eschew the low-risk entry that a throwback provides. While upside potential is less, it could still provide material gains with limited downside.
Eaton is one of the top-yielding industrial stocks.
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.