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WINDERMERE, Fla. (Stockpickr) -- Things are predictably heating up across the pond as Greece sits on the edge of missing the deadline to agree to a bailout package before the country defaults. As I write, news is only just emerging that a deal may coming out of the process.
While that’s news that would have sent U.S. stocks down dramatically back in 2011, it’s barely making a dent on the market this morning. If that’s not a sign of the sentiment shift for investors in 2012, I don’t know what is.
As I’ve said before, Europe still has potential to derail the broad market here at home. As our biggest trading partner, it’s no surprise that correlations are high between EU and U.S. stocks. But at this point, investors have largely priced in the same kind of incompetence from eurozone political leaders that we expect from our own. That’s the critical difference between how stocks are reacting this year vs. last.
That strong sentiment for equity investors is creating ample opportunities this week as earnings season trudges on. To take full advantage, we’re looking at technical trading setups in five of Wall Street’s big-name stocks today.
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.
Forest products company Weyerhaeuser (WY) is having a good run in 2012 -- shares are already up double digits this year on the strength of the firm’s solid fourth-quarter earnings at the start of the month as well as the slow climb of the timber market. Weyerhaeuser owns or leases more than 20.5 million acres of forests, on which the company grows and harvests trees and builds homes.
In the near-term, Weyerhaeuser could be seeing even more upside.
That’s because shares are currently forming a short-term ascending triangle setup with resistance right at the $21 level and uptrending support below. Traders will need to see shares push above that $21 level for two consecutive trading days before it makes sense to be a buyer in WY.
This isn’t the first time that shares have formed this particular pattern. Weyerhaeuser effectively formed an ascending triangle during the last fourth quarter of 2011, breaking out at the end of December to spark the rally shares have seen this year.
The pattern we’re seeing in Weyerhaeuser right now shouldn’t be viewed in a vacuum; it’s a shorter-term setup that’s likely to add onto the upside potential provided by the breakout from the end of last year.
Weyerhaeuser is one of John Paulson's top holdings, comprising 1.8% of Paulson & Co.'s total portfolio as of the most recently reported period.
What do a timber company and a carmaker have in common? Normally, not much. But from a technical standpoint, these two stocks are looking a lot alike.
As with Weyerhaeuser, car giant Ford (F) is forming a very short-term ascending triangle setup that’s coming after a longer-term ascending triangle already broke out.
That’s an important change for Ford, a stock that saw its share price decline by more than 18% in the last 12 months. The bullish implications of the setup in Ford’s shares means that this stock is turning the corner.
Right now, the resistance level to watch in Ford is $13 -- that’s the price that traders will want to see get taken out before it makes sense to be a buyer of this stock. Resistance levels, like the one bounding Ford’s setup, are caused by gluts of supply in the marketplace; once they’re exceeded, we’ve got a good indication that one of the biggest stumbling blocks for a rally has been absorbed by buyers.
I’d recommend sitting on the sidelines until the breakout happens.
Broadcom (BRCM) has been making a prodigious rally of its own in 2012. Year-to-date, shares of the semiconductor firm have rallied nearly 30% thanks to strong fundamental performance. That fundamental strength is setting the stage for another technical breakout for shareholders in February.
Right now, Broadcom is testing key resistance at $38, a price that’s previously acted as a strong price ceiling for shares. A breakout above that price would indicate that buyers are in control of the market for BRCM == creating a solid buying opportunity as share prices seek to put supply and demand back in balance by ratcheting higher.
The series of support levels below shares of Broadcom provides at least some downside protection for traders right now, although S1 is a bit too far below current price levels to justify taking a position before the breakout in BRCM actually happens.
More significant, the abundance of technically significant levels tells us that this stock is trading well in line with our technical outlook right now. That should provide some added assurance over the validity of a breakout in Broadcom.
IPOs were all the rage in 2011, as the market for newly-minted public companies heated up considerably amid an otherwise tepid trading environment. But with the dust settled form the year’s new offerings, small-cap computer storage firm Fusion-io (FIO) actually stands out as one of the best performers of the year, having managed not to eradicate the investments of shareholders who bought right after the company’s IPO this summer.
From a technical standpoint, this stock is still one of the more tradable IPO names, thanks to a solid if/then setup that’s currently forming in shares. If/then setups occur when a stock is trading in a well-defined horizontal range that’s bounded by strong support and resistance and doesn’t show any directional bias. It’s a contingent setup that’s dependent on how FIO breaks outside of its channel.
So, put simply, if FIO breaks out above $30 resistance, then traders have a buy signal on shares. Otherwise, if FIO breaks down below $22 support, then this stock becomes a short candidate. A breakout in one direction or the other is inevitable -- but I wouldn’t recommend taking a position until one of those conditions gets met.
Fusion-IO shows up on a list of 4 Companies Riding Facebook's Wave.
Bank of America
Finally, let’s wrap up with a blast from the past: last week’s trading setup in Bank of America (BAC). In last week’s column, we took a look at the trade that was setting up in shares of BofA, paying particular attention to the breakout level at $7.50. The outlook was pretty simple:
“Put more simply, $7.50 is a price above which sellers are more inclined to take gains than buyers are to continue buying. … A push above $7.50 would provide traders with a strong signal to buy.”
Sure enough, that’s exactly what happened just a couple of trading days later, providing traders who took a position if BofA with 8.2% gains (the similar Citigroup (C) trade we were watching generated 6.25% upside). So, where does this banking giant go next?
Shares are approaching a previous resistance level right around $8.50 right now. That’s a price that could potentially serve as a stumbling block for the rally shares are enjoying right now. I’d recommend that risk-averse traders exit the position just shy of that price level -- those with larger risk appetites would do well to simple place a trailing stop and sit back while this stock tests that upside target.
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.