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5 Big Stocks to Trade for Gains This Week - 8218 views
BALTIMORE (Stockpickr) -- Politics are continuing to cavort with the financial world from the eurozone to Washington this week -- not a particularly nice combination.
From updates on the latest plan to solve Greece’s cash crisis to the continued back-and-forth over President Obama’s jobs bill, the news items are continuing to rule the financial markets once again. Ultimately, until minds are made up -- and the potential consequences of either political minefield are known -- there’s a pretty big uncertainty factor hanging over the stock market. And investors have reason to be frustrated.
Even though yesterday’s close brought us to three straight days of positive moves for stocks, the road hasn’t exactly been easy this week. Those three days were each chock full of investor anxiety and intraday volatility -- signs that while we may be a comfortable 8% above those August lows right now, investors remain far from comfortable this week.
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The flux on Wall Street was also enough to delay Facebook’s front-page IPO, according to reports. Even if risk appetites are decreasing, gain-hungry traders and investors have opportunities right in front of them. I’m talking about technical trading opportunities this week in some of Wall Street’s biggest-name stocks and ETFs.
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, technicals are 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 Gold Trust ETF
Everyone’s favorite precious metals fund, the SPDR Gold Trust ETF (GLD), has been the flight-to-quality investment of choice for millions of investors in 2011. And why not? The $75 billion trust owns physical gold that it stores in underground vaults -- it’s a goldbug’s dream.
Let’s be honest: Gold isn’t a safer alternative to the S&P 500; this metal offers plenty of volatility of its own for investors. Instead, gold (and GLD, by proxy) is an alternative asset that generally offers negative correlation (or little to no correlation) with the S&P 500.
That’s what makes gold worth buying in this market.
And right now could be a pretty good time to buy. From a technical perspective , gold is forming a bullish ascending triangle setup, a formation that’s characterized by horizontal resistance to the upside and uptrending support below. The buy trigger on an ascending triangle comes when shares break above that resistance level. That’s when the supply/demand equation shifts in buyers’ favor. The resistance level to watch for right now is $185. A short-term volatility squeeze could help slingshot prices higher in the very near-term.
It’s important to remember that gold has strong intermarket relationships with other asset classes (particularly other flight-to-quality alternatives like treasuries), which makes the metal fairly elastic to the news in Europe. A breakout above $185 suggests that investors have gained assurance over the impact of the headlines on the metal.
United States Oil Fund
From one commodity to another -- one that’s showing us the exact same technical pattern this week. The United States Oil Fund (USO) is a commodity pool that invests in oil futures, and like GLD, it’s become one of the most popular ways to gain exposure to crude prices. Like gold, oil is in the process of forming a bullish ascending triangle bottom, this time with resistance right around the $36 level.
It’s somewhat rare to see similar patterns like this pop up in two heavily traded commodities, but it’s certainly not unheard of. It all comes down to flow of funds. I suspect that the similarities between oil and gold are more coincidence than anything else, but they’re providing two actionable opportunities either way.
One thing to watch in USO is the downtrending channel that shares have been locked in for the entire summer. While the stock’s ascending triangle is a bullish sign, it wouldn’t be the first time that USO has shown signs of life only to get bashed lower when it hit trend line resistance.
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Meanwhile, a less directional setup is taking place in shares of the biggest oil stock, Exxon Mobil (XOM). Since Exxon’s bottom back in August, shares have been stuck sideways, trading in a range constrained by a horizontal resistance and support level. At this point, traders should be waiting for a breakout in either direction.
The breakout direction dictates which side of the trade you’ll want to be on. The bullish inclinations in crude give us a little hint at which direction is more likely.
One notable part of the Exxon chart is the bottom in August, which actually exceeded the lower range of the consolidation channel. Normally, that sort of bottom would provide a fairly strong support level, but I’m not particularly convinced that it would hold up well. After all, that bottom was set when the S&P 500 Implied Correlation Index was hitting highs, and constituent stocks ($353 billion Exxon, in particular) were getting undue influence from index sellers. Don’t put too much emphasis on what was a temporary shift in supply and demand.
Either way this trade progresses, I’d suggest placing a protective stop just inside the channel.
As of the most recently reported period, Warren Buffett's Berkshire Hathway portfolio had maintained its 421,800-share position in Exxon, and the stock is also one of the top holdings of Renaissance Technologies.
Dish Network (DISH) is showing us a less “textbook” pattern right now, but the trading implications are definitely worth watching. Dish has been making higher highs and lows since the end of September, a consistent set of short-term breakouts that tell us that buyers are controlling this stock’s price action right now.
One of the biggest indicators of Dish's upside potential is just how fast shares fell down earlier this summer, plunging at warp speed to find a bottom just shy of $21. That fast descent left Dish without any meaningful resistance levels to constrain a rally on the way back up. That’s a small part of why it’s been so easy for Dish to stage a recovery.
Shares pushed above their previous highs in yesterday’s strong price action, a good entry opportunity for traders. Provided that today gives Dish another white bar, I’d suggest taking a long position in shares for a short-term trade. A protective stop just below the stock’s most recent swing low at $24 reduces the risk on this trade.
Dish is one of the top holdings of Leon Cooperman's Omega Advisors, comprising 1.7% of the total portfolio.
SPDR S&P 500 Index ETF
Finally, it makes sense to take a look at what the broad market’s doing.
For that, we’ll turn to the SPDR S&P 500 Index (SPY), an $81 billion fund that tracks the performance of the S&P 500. Despite all of the uncertainty, Mr. Market has been reluctantly living up to the expectations that we put in place back in the middle of August.
At this point, stocks are moving higher in an uptrending channel that currently has support right around the 1140 level and ultimate support right at the 1120 lows that the S&P put in on Aug. 8. If the S&P falls below 1120, that’s where investors are going to start hitting the panic button.
For now, the uptrending channel in the S&P is a solid sign for bulls -- even if grinding out those gains has been a frustrating business for market participants in the last few weeks. From a trading perspective, the lowest-risk opportunity comes on any bounce off of that trend line support level. I wouldn’t want to be long the broad market below that lower blue line.
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.