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- 4 Stocks Under $10 Triggering Breakouts
- 3 Stocks Under $10 Making Big Moves
5 Big Stocks to Trade for Gains in April - views
BALTIMORE (Stockpickr) -- The mantra of “new month, new market” is holding true again in April.
Investors are shifting sentiment by the calendar month in 2012, opting to turn bullish as the page turned to January, and now ramping up anxiety in April’s first week of trading. Stocks are headed into what looks like a third day of selling today, a move that’s being attributed to the Fed’s not announcing another round of quantitative easing on Tuesday, and now rising borrowing costs for Spain.
But what’s really changed? Not much.
Let’s not forget that Mr. Market just came off the biggest gaining first quarter in a decade. A week or two of sideways trading isn’t exactly reason to run for the hills just yet. And in fact, the last couple weeks of selling have pushed the S&P 500’s RSI reading within a few points of the neutral 50 level.
The last time that momentum gauge hit 50 was back in March, when stocks pulled back under similar circumstances only to double the S&P’s 2012 gains in the month that followed. That’s why at this point, traders shouldn’t be looking for the exit signs -- they should be looking for buying opportunities.
To find those, we’re turning to the technicals in five of Wall Street’s big-name stocks this week.
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 rough year for shares of network infrastructure firm Juniper Networks (JNPR) -- shares of the $11 billion firm have slid more than 47% in the last 12 months, dragged lower by a combination of underwhelming fundamental performance and market headwinds in the latter half of 2011. But now this stock could be on the upswing.
Juniper is currently forming an ascending triangle bottom, a setup that’s formed by the combination of horizontal resistance above shares and uptrending support below them. Essentially, as shares bounce in between those two technical levels, they’re getting squeezed closer and closer to a breakout above resistance (at $25, in Juniper’s case). When that breakout happens, traders have a high-probability buy signal on their hands.
The $25 resistance level in Juniper coincides with a gap that the firm formed after posting third-quarter numbers that came in well short of expectations. That gap could get filled quickly once the breakout happens -- that’s a good sign. So is our momentum gauge, 14-day RSI; with momentum in an uptrend since the start of last summer, we’ve got a good indication that buying continues to accelerate right now. Because momentum is a leading indicator of price, that fact adds some major assurance to this pattern.
Still, I wouldn’t be a buyer unless JNPR closed above $25.
Juniper shows up on a list of Tech Stocks to Look Out for in 2012.
A similar setup is shaping up in shares of railroad stock CSX (CSX). Despite going into 2011 as a defensive favorite, CSX is another name that got shellacked in the last year, falling 15% at the same time the S&P was able to post meager gains.
Part of that weakness comes from CSX’s status as a transport sector stalwart. At the front end of the business cycle, transport stocks suffer first when times get tough. But on the flipside, they’re also the first to benefit when the economy rebounds.
Now investors are getting signaled that it’s time to board this train.
Like Juniper, CSX is forming an ascending triangle bottom, in this case with a resistance range between $23 and $23.50. While the existence of a resistance range makes the setup in CSX a bit tougher to trade, the basic rules are the same: we’re looking for a breakout above $23 before it makes sense to buy.
Because of that secondary resistance level at $23.50, we don’t have as clear a view of where the glut of supply of shares exists for CXS. For that reason, I’d recommend taking on a starter position at $23, then scaling into the stock as it pushes through $23.50.
Regardless of how you opt to enter the trade, it makes a lot of sense to keep a protective stop just below the $21 swing low.
Thomson Reuters (TRI) is another beaten-down name that’s showing traders an ostensibly bullish setup right now. TRI is currently forming an inverse head and shoulders pattern, a setup that indicates exhaustion among buyers. With shares down close to 28% in the last 12 months, sellers certainly have a lot to be exhausted about.
Here’s how to trade this financial firm.
An inverse head and shoulders is spotted by three “troughs” forming in shares: two “shoulders” that bottom around the same level and a “head” between them that bottoms lower. The resistance level that restrains the pattern to the upside is called the neckline; in TRI’s case, that price is $30. It makes sense to take a long position in shares once this stock is able to breakout above the neckline.
TRI has flirted with $30 a couple of times in the last month, but the breakout was never confirmed by two consecutive closes above that neckline price. That’s the condition traders should be looking for before they go long.
Up to this point, we’ve been focusing on breakout trades – trades that need to push above a resistance level before they become buyable. Now, we’ll switch to a range trade setting up in shares of fast food giant McDonald’s (MCD).
Unlike the breakout trades we’ve looked at, we just want McDonald’s to keep doing more of the same. That’s because shares have been stuck in a well-defined uptrend for the last year. Trend line support has done a very good job of acting like a price floor for shares of MCD in the past. If it can pull that job off again, traders are looking at an optimal entry opportunity this week to ride the trend in April.
When trading a trend, it’s crucial to wait for shares to actually bounce off of trendline support before buying. That’s because trend lines do eventually fail -- and when they do, you won’t want to be holding the bag. The bounce tells us that MCD can still catch a bid at support, a factor that dramatically reduces the risk of buying shares.
Wait for that next bounce before putting on an MCD position.
Finally, let’s take a look at mid-cap communications firm Frontier Communications (FTR), a stock that’s forming a textbook example of a classic technical pattern. Right now, Frontier is forming a double bottom, a setup that’s identified by two swing lows that occur around the same level following a downtrend.
Those two bottoms tell us that there’s a glut of demand for shares of Frontier below the $4 mark.
The buy signal for Frontier comes on a push above resistance at $4.70. At that point, Frontier’s downtrend is broken, and the high probability trade turns to the bulls’ side. Besides the appearance of this pattern, there are a couple of other factors that make this setup a textbook double bottom: first, volume has been declining throughout the pattern – while that sounds like a negative, it actually lends confirmation to the pattern.
On the breakout, we’ll want to see volume spike as more buyers participate in the move. The other factor is momentum -- RSI has been uptrending since the first bottom in shares back in February. That provides bullish confirmation of a move higher in April...
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.