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BALTIMORE (Stockpickr) -- It’s data Thursday, which means that a slew of market-moving numbers are set to hit Wall Street today. From housing and jobs numbers this morning to Philly Fed and money supply data coming in later today, there are a lot of potential catalysts that are getting priced into the broad market this week -- and we haven’t even touched on earnings yet.
So far this month, 27 S&P 500 constituents have reported their numbers, with 16 names posting positive earnings surprise for the quarter. If that trend can continue, investors should have some extra incentives to accumulate equities for a change.
By and large, though, stocks are moving based on technicals this month. That gives us all the more reason to keep an eye on the technical outlooks of some of Wall Street’s biggest 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.
SPDR S&P 500 ETF
It makes sense to take a technical look at what’s going on in the broad market. We’ll do that with the SPDR S&P 500 ETF (SPY), an exchange traded fund that tracks the 500 stocks in the S&P 500 Index. This $93.5 billion fund is many investors’ easiest way to get exposure to stocks as an asset class.
Right now, the S&P 500 is offering up a good example of the phrase “a rising tide lifts all ships.” That’s because the index is offering up an ascending triangle setup right now, a bullish formation that’s formed by a horizontal resistance range and uptrending support. Essentially, as shares of SPY bounced in between resistance at $128 and uptrending support below, they got squeezed closer and closer to a breakout above that $128 level. That happened late last week when shares popped above resistance for the first time since the August crash.
That bullish setup in the S&P 500 is a good thing for stocks in general. Because correlations between the S&P and its constituent stocks are still very high, that means that a larger group of individual stocks are likely to see additional upside in January.
High correlations aren’t benefitting IBM (IBM) right now. Shares of this $213 billion information technology giant are showing traders an ostensibly bearish setup right now – it all comes down to whether it triggers this month.
The bearish setup in IBM is a head-and-shoulders top, a pattern that indicates exhaustion among buyers. The head and shoulders is identified by two swing peaks (shoulders) separated by a higher swing peak (head). When shares break through their neckline, short sellers have an actionable sell signal in this stock – until that happens, though, going short IBM isn’t a high probability trade.
Even though the head-and-shoulders (and its inverse) 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.” That’s a good reason to keep an eye on IBM this week.
Meanwhile, the opposite setup is taking place in shares of Amazon.com (AMZN). Amazon has been under significant pressure from sellers in the last quarter, tumbling more than 22% as shareholders became willing to part with their shares at any cost. Now, though, an inverse head-and-shoulders formation tells us that Amazon’s selling pressure is getting exhausted; this stock may have found its bottom.
In Amazon’s case, we’re looking at a much shorter-timeframe setup than the head and shoulders top in IBM. As a result, the trading implications are a bit less material for Amazon. Even so, the size of the stock’s breakout through its neckline Wednesday is a major indication that the technicals matter in this stock right now. If you decide to take the long side of AMZN, I’d recommend keeping a protective stop right on the other side of the neckline – currently right around $180.
Traders should keep a close eye on fourth quarter earnings at the end of the month.
Apache Corporation (APA) is benefitting from overall strength in the energy sector. This natural gas and oil exploration firm has rallied nearly 19% since the start of October, bouncing hard of the bottom that APA set in synch with the S&P 500. While shares are looking less directional right now, there’s still a trade to be made in this stock.
Since November, shares of Apache have been consolidating in a horizontal range, bounded by strong horizontal support and resistance levels. Complicating things a bit is the fact that those levels don’t hit a single clear price – instead, they’re ranges where there’s a large glut of demand and supply respectively. Despite a few added complexities in the setup, Apache is a good example of an “if/then” trade.
Simply put, this stock’s if/then setup works like this: If shares break out above $100 resistance, then buy. If shares break down below $87 support, then APA is a short candidate again. Either way it progresses, I’d recommend placing a protective stop back just within the channel.
Last up this week is railroad firm Norfolk Southern (NSC), a stock that’s showing a similar pattern to the If/Then Trade in Apache. Between early November and the start of 2012, shares of Norfolk Southern had been consolidating in a horizontal range – but shares broke out at the start of the new year, triggering a buy signal. Now, this stock is throwing back to support, a move that gives traders a second chance at this stock.
Essentially, a throwback happens when shares breakout only to retest the price level that they broke out above. Because resistance turns into support when it’s broken, Norfolk Southern’s ability to hold support at $75 will be important. While a throwback seems like a bad thing (it’s a reversal, after all), throwbacks can actually be good for traders because they confirm the technical strength of a move. Better, they let traders who were late to the game get a second chance at a low-risk entry in shares.
The key to trading this throwback in Norfolk Southern is to wait for shares to bounce off of $75. That bounce tells us that NSC is able to catch a bid at support, and there’s still upside in this stock.
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.