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5 Big Stocks to Trade for Gains - 27907 views
BALTIMORE (Stockpickr) -- Six consecutive days -- that’s how many of the S&P 500’s trading sessions have ended lower of late, a feat that stocks haven’t managed to accomplish in the last several years. The implications of that sort of market weakness are significant right now.
Last week, when the selling started, I mentioned that the S&P 500 was a stone’s throw from key support at 1300, a level that we wouldn’t want to see tested under our current market conditions. Sure enough, stocks fell through 1300 on Monday and haven’t looked back. As a result, the S&P is up just 1.74% year-to-date, a far cry from the double-digit gains that the average sported earlier this year.
So what should we expect next? The fact that so many large stocks (which make up a large chunk of the S&P) are nearing support makes a good case for finding a near-term bottom soon – or at least a pocket of demand to slow the decline. Technically, we’re still above our long-term trend line, a fact that suggests that it’s not quite time to panic.
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With all of that in mind, let’s turn to the technicals on Wall Street biggest names for a more actionable trading plan for the week.
In case you’re not familiar with technical analysis, 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 by some measures, 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 high-volume stocks.
Best-in-breed automaker Ford (F) is a good example of a large name that’s approaching an important support level right now. The $52 billion company has seen its shares under pressure for much of 2011, tumbling more than 18% since the first trading day of January. But with shares settling into a previous support level right now, this stock could contribute to a cooling of the S&P’s selloff.
The $13.75 low that shares hit back in March turned out to be a key reversal day for Ford, as the stock generated one of its largest-ranging positive days of the year. The fact that a key reversal day occurred at that price level makes it an important support level for shareholders to watch right now -- the implication is that significant demand exists for shares near that price.
That doesn’t mean that it’s a good idea to pick up shares of Ford right now. Remember, support levels do fail -- and early buyers are left holding the bag. Instead, wait for a bounce off of that support level before buying. The bounce confirms that it’s still a valid technical price level.
This $150 billion firm is essentially flat on the year, albeit not for a lack of volatile price action. Coke’s current positioning could be a buying opportunity, but we’ll need to see shares break above their current consolidation range.
In Coke’s case, shares actually hit support back on Friday but haven’t actually managed to bounce higher given the broad market’s overwhelming downward pressure. While that is a concern, the fact that shares have held steadfast at that support level for the past four trading days is a good sign nonetheless.
The sideways consolidation in Coke gives traders a solid target for an entry -- or a short. Wait for a break out of the consolidation range, then make a bet in the direction of that break.
Coke is a favorite of various high-profile investors, including Jim Simons of Renaissance Technologies, which increased its position in the stock in the first quarter to 3.5 million shares, and Warren Buffett, whose Berkshire Hathaway counts the stock as its top holding, comprising 24.8% of the total portfolio.
While energy stocks saw a crude price-driven rebound yesterday, miners didn’t share that same price action. Metals continue to have a high correlation with stocks right now, the result of the finite uninvested capital positions that market participants are experiencing.
As such, big-name miners such as Freeport McMoRan (FCX) are looking less than bullish right now.
In the case of Freeport, shares are developing in a setup known as a descending triangle. Essentially, a descending triangle is characterized by a horizontal support level on the downside and a downtrending resistance level above. The downtrending resistance indicates that traders are willing to unload shares of Freeport at increasingly low prices. As those prices get squeezed toward support, the potential of a breakdown well below $46 increases.
Freeport's directional bias to the downside is still fairly tentative right now -- and better-looking setups in the metals Freeport mines suggest that a trade shouldn’t be made unless a definitive breakdown occurs below $46. Otherwise, a breakout above the pattern’s bounds could be a good upside trade on commodity strength -- that’s why it’s crucial to wait for the setup to play out fully to capture a high-probability opportunity.
Freeport, one of the top-yielding metals and mining stocks, received some bullish attention in the first quarter from, among others, Ken Fisher, whose Fisher Asset Management upped its position in the stock to 12.9 million shares.
Oil and gas servicer Baker Hughes (BHI) wasn’t one of the energy names that took advantage of the upside in crude yesterday. Instead, shares of the company held in a tight range for the entire trading session. Even so, the stock does show some longer-term upside potential right now.
Baker Hughes is showing the exact opposite setup that Freeport is experiencing: an ascending triangle. As in the case of Freeport, it’s important to wait for the breakout before buying, though the directional bias is stronger in this play right now.
Complicating matters is the fact that upside resistance is in the form of a range, not a single level. To trade this setup, I’d suggest buying on a definitive break above R1, then hiking your protective stop up to your entry as shares test their strength against R2.
Research In Motion
Last up this week is a blast from the past -- a recap of last week’s Research In Motion (RIMM) setup. Shares of RIM got hit hard in the June 1 market selloff, but I warned that a break below $42.50 support likely meant that further selling was in store.
Sure enough, shorting RIM last Thursday would have generated near-double-digit gains while the broad market lost 2.6%. Shares are deep in 52-week low territory right now. As a result, investors are going to be looking for an opportunity to pick up shares at a discount.
If that’s your plan, wait for confirmation of a stop to the selling (a white bar day followed by another consecutive day of buying, both on strong volume), and then keep a tight protective stop just below the 52-week low.
Spotting bottoms in fast-falling stocks such as RIM is only easily done in hindsight. While using this strategy improves your odds, it also preserves the vast majority of your capital if you’re wrong. That’s a critical part of any trading strategy.
To see this week’s potential 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.