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BALTIMORE (Stockpickr) -- Well, it may only be Thursday, but it’s been quite a week for stocks already.
Since Monday, the S&P 500 has rocketed by 7.62%, effectively reversing last week’s similarly sized losses and putting the broad market back within grasp of positive territory on the year. With the first trading day of December already upon us, Mr. Market has no time to lose. Now the question is whether stocks will be able to continue their trajectory.
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While there’s still considerable uncertainty in the equity markets right now, one thing is clear from this week’s price action: The market is trading on technical factors, not fundamentals right now. First off, stocks were woefully oversold leading into this week after posting the worst Thanksgiving-week stock performance since 1932, and now the reaction to central bankers’ liquidity moves is an equally outsized overreaction.
So as we kick off December, the news itself isn’t as important as the swings taking place in the supply/demand equation for the broad market. This week, we’ll take a look at five big names that could benefit from that.
In case 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.
First up this week is Canadian communications firm BCE (BCE). This $30.5 billion communications stock has had quite a year in 2011 -- not only have shares rallied 10.5% so far, but the stock also pays out a 5.24% dividend yield right now. But technical factors suggest that BCE could be in store for even more upside in the next couple of months.
Right now, BCE is forming a long-term ascending triangle setup, a bullish pattern that’s characterized by a staunch horizontal resistance level above shares and rising trend line support below. Essentially, as shares get bounced in between those two technically significant price levels, they get squeezed closer and closer to a breakout above that resistance level (at $39.50 in BCE’s case). When that breakout happens, it’s time to be a buyer.
A couple of other factors are making BCE a textbook setup right now. First is the fact that volume has been declining for the duration of the pattern -- it may seem anti-intuitive that declining volume is a good thing for a bullish technical pattern, but it is.
More important, we’ll want to see any breakout above $39.50 come with a volume spike. Finally, momentum (as measured by a 14-day RSI line) has been confirming upside as shares climb in the triangle, a bullish sign.
Wait for the breakout before buying this long-term bullish setup.
Despite the abundance of selling in the broad market, BCE isn’t the only name that’s showing ostensibly positive technicals as we enter December. DuPont (DD) is another name that’s showing traders a bullish setup right now. In the case of this chemical giant, the formation we’re watching is an inverse head-and-shoulders setup, a common bottoming pattern that suggests exhaustion among sellers.
DuPont has a slightly upward sloping neckline that’s currently at the $49.50 level, a price that acts as a breakout level for this pattern. When shares of DuPont push above their neckline, it tells us that buyers are decisively in control of this stock. Even though the head-and-shoulders (inverse or not) is likely the most well known technical pattern, it’s still a valuable one: 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.”
To wrangle your risk on this trade, it’s important to enter the position (when it triggers) with your stop loss levels already in mind. A line parallel to the neckline also acts as a support level for DuPont's shoulders right now -- that symmetry makes it an ideal stop level to avoid getting whipsawed out of the position.
DuPont is one of the top-yielding chemicals stocks.
Yahoo! (YHOO) has been getting a lot of attention from traders for fundamental reasons lately. From management shakeups to private bids for minority ownership, Yahoo! has consistently been a headline stock this year. Now, though, a short-term if/then trade could provide some headline gains for your portfolio.
An if/then trade is a setup whose direction is contingent on the direction of the breakout from a horizontal channel. Put more simply, if shares of Yahoo! break out above resistance, then buy. Otherwise, if shares break down below support, then sell Yahoo! short. The lack of directional bias in the channel is the most distinctive characteristic of this setup.
Occasionally, an if/then trade will show some directional bias on a secondary indicator, such as momentum. In Yahoo!’s case, this trade couldn’t be any more textbook; RSI is pointed similarly sideways right now.
Either way, this trade eventually pans out, I’d recommend placing a protective stop just inside the channel.
Scott Rothbort featured Yahoo! recently in his "11 Worst-Run Companies of 2011," saying he was "skeptical that this company can succeed on its own."
Another big tech stock that’s showing traders an if/then trade right now is IBM (IBM). Big Blue, like Yahoo!, has been exhibiting considerable relative strength compared with the broad market for the last few months, pushing through to new swing highs as the S&P was testing new lows. Statistically, that indicates outperformance will continue on the three-to-ten-month time horizon.
But that’s the only clue we have to IBM’s ultimate breakout direction. While that added bit of information is useful for planning a trade, an actual technical breakout above $190 resistance has to be the buy signal for this setup. Failing that, a short signal comes on a slide below support at $176.
Generally speaking, the price target for an if/then trade comes by measuring the height of the channel (the distance between resistance and support), then adding that distance to the breakout point. While not a hard rule, that minimum measuring objective should provide traders with some guidance on when this trade has run its course.
IBM, one of Warren Buffett's six new investments in the most recently reported quarter, shows up on a recent list of 5 Gadget Stocks for the Holidays. It's also one of Jon DeFeo's 10 Best Dow Dividend Stocks for 2012.
Last up this week is Wal-Mart (WMT), a throwback from last week’s column. Wal-Mart is a perfect example of why it’s so crucial to wait for a breakout before taking a position in a stock. When we last looked at Wal-Mart, it was forming a head-and-shoulders top, a bearish setup that had negative trading implications for the world’s largest retailer.
But shares never broke down below their neckline. Instead, they swung back up to re-test resistance at $59, the “head” of the previous pattern; a breakout above that price would be a very bullish turn for traders.
Since the previous neckline still acts as a support level for shares right now, Wal-Mart has worked its way into another if/then Setup -- even if it’s a faster-moving one than the other two we’ve looked at today.
With shares testing resistance at $59 today, there’s a real potential for this stock to trigger as an upside trade. Traders should keep a close eye on this name as a short-term way to play the market’s volatility.
Wal-Mart also shows up in Warren Buffett's portfolio.
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.