Stock Quotes in this Article: BAC NFLX F CAT DHR

BALTIMORE (Stockpickr) -- Low volume holiday trading continues to be the norm this week, as sizable numbers of traders take an extended reprieve from wrangling Mr. Market.

It’s not just that we’re in a holiday week either. All told, 2011 has been a year of volatility and indecisiveness among market participants -- and the second-worst year on record for hedge funds and Wall Street trading desks. So it’s no great surprise that many professionals aren’t willing to take on additional market exposure during the final week of the year.

So while the changeover to the New Year is typically a non-event for stocks, it may well be a big one this year as performance books close for 2011 and professional investors get a chance to start again with a clean slate. Meanwhile, that sideline action is leaving a handful of technical trading opportunities on the table in Wall Street’s biggest-name stocks.

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    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.

    Bank of America

    When it comes to banking giant Bank of America (BAC), the question on most investors’ minds in 2011 has been, “How low can it go?” Year-to-date, shares of the country’s second-largest bank have slid more than 60%, as headline risk and shaky financial ground left BofA scrambling to address its issues. So, can Bank of America move lower? The answer is a resounding “yes.”

    Right now, Bank of America is forming a descending triangle, a bearish pattern that’s identified by a horizontal support level that’s acting as a “floor” for shares, and downtrending resistance above. A sustained breakdown below that support level (currently around $5) sends a decisive sell signal to investors.

    Bank of America has been a particularly volatile stock this year -- that means that traders will need to move quickly to take advantage of a shorting opportunity below $5. When it happens, keep a protective stop just on the other side of that downtrending resistance level. The 50-day moving average acts as a reasonable proxy for that trendline.

    Netflix

     

    Netflix (NFLX) is another name that’s taken on whipping-boy status in 2011, driven 60% lower as well this year by a series of shockingly bad management blunders – and the customer exodus that’s resulted from them. Netflix’s fall from grace is particularly bad because of just how well liked this stock was during the first half of the year (NFLX rallied more than 52% between January and July). But now, there’s a trade to be made in Netflix.

    Shares found support at $64, bottoming (at least temporarily) at the start of this month. With a resistance level put in at $75, we’re now looking at an “If/Then Setup” in shares of Netflix.

    Simply put, this stock’s If/Then Setup works like this: If shares break out above resistance, then buy. If shares break down below support, then NFLX is a short candidate again. Until one of those conditions gets met, I’d suggest sitting on the sidelines. Momentum, measured by 14-day RSI, has been accelerating recently; that factor could favor a breakout to the upside.

    Caterpillar

     

    Another example of an If/Then Setup is taking place in shares of construction and agricultural equipment maker Caterpillar (CAT). Shares of CAT have been locked between support at $87 and resistance at $98 for the last couple of months, bouncing no fewer than six times off of those technical levels in the process.

    Traders should be looking for a breakout outside of Caterpillar’s sideways channel. When that happens, it’s a signal to take a position in the direction of the move.

    If/Then Setups like the one in Caterpillar and Netflix work because the support and resistance levels acting as barriers to price movement are caused by gluts of supply and demand for shares. In Caterpillar’s case, for instance, resistance at $98 exists because there is an abundance of sellers waiting to unload shares at that price. A breakout above $98 would indicate that buyers have absorbed that excess supply -- and now shares are without a stumbling block to the upside.

    Either way this trade plays out, I’d suggest keeping a protective stop back just within the channel.

    Ford

     

    Ford (F) is doing a good job of demonstrating the market’s indecision right now, thanks to a symmetrical triangle that’s forming in shares. A symmetrical triangle is a technical pattern that’s formed by price when two opposing trendlines converge. In many ways, this setup mirrors the If/Then trades we just looked at, but with a couple of key differences.

    Like an If/Then trade, you want to “buy the breakout” on a symmetrical triangle. That is, you want to trade in the direction of a break of one of those trendlines (for the exact same reasons). But unlike an If/Then trade, a symmetrical triangle tends to have more bias in the direction of the stock’s overarching trend. So because Ford is currently in a downtrend, there’s a higher likelihood that we’ll see shares break to the downside of the triangle.

    Another important factor at play is volatility. A triangle is essentially a volatility squeeze, a period where volatility is diminishing below historic levels. Because volatility is cyclical, volatility squeezes are usually followed by periods of high volatility and strong moves – that means that traders will want to act fast one a breakout takes place.

    Danaher Corporation

     

    Another symmetrical triangle is taking shape in shares of Danaher Corporation (DHR). For the most part, this setup has the exact same trading implications as the setup in Ford: you want to wait for a breakout above or below the triangle as a buy or sell signal, respectively. For Danaher, though, a previous uptrend indicates that there’s upward bias.

    Danaher had been rallying off of October lows when the triangle started forming in shares -- that gives a small indication that an upward breakout is more likely. The fact that the uptrend in RSI remains intact is an even better bit of confirmation. Either way, this stock doesn’t become a high-probability trade until a move outside of the triangle happens.

    To see this week’s trades in action, check out the High Volume Technicals portfolio on Stockpickr.

    -- Written by Jonas Elmerraji in Baltimore.

     

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    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.