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BALTIMORE (Stockpickr) -- Mr. Market is showing off his rally-then-reverse abilities again this week, churning just under the 1225 level for the S&P 500. But for investors who haven’t been made seasick by that constant up and down, it’s likely we’ll see a more meaningful move in the near term. More on that in a minute.
The lack of directional trading in stocks has been a real problem in the last couple of months. Coupled with volatility, that sideways churning has been hammering both longs and shorts lately. While earnings have been mostly better than expected so far this quarter, they’ve been mixed enough to prevent a more definite sentiment shift on Wall Street.
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That said, we’re still waiting on more than 80% of the S&P to report their third-quarter numbers right now. Those earnings will have a big impact on investors’ risk appetites as we approach the end of 2011.
In the meantime, there are still trades to be made in October. On an individual basis, technical trades are starting to spring up in some of Wall Street’s biggest names.
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 S&P 500 ETF
Let’s start off with a look at the broad market through the SPDR S&P 500 ETF (SPY), an exchange-traded fund that tracks the S&P 500. Stocks have been rallying hard ever since the start of October, moving from a test of channel support at 110 all the way up to resistance at $125. It’s not surprising that buyers have having a hard time propping stocks through that overhead resistance level.
From a practical standpoint, you can think of that $125 resistance level as a price above which there’s a massive glut of supply for S&P 500 stocks. As that supply overwhelms buyers’ demand, it creates a sort of price ceiling that keeps shares from moving higher. $125 has been the level to watch since the end of August; I’d recommend being a buyer if shares can break out above that level.
Extremely high correlations between the S&P 500 and its constituent stocks remain a major concern for investors right now. As I write, approximately there’s around a 75% correlation between the index and its stocks -- that means that it’s incredibly hard to get real portfolio diversification right now.
As we’ll see, though, there are some high-profile exceptions to that rule.
Take Intel (INTC), for example. One look at Intel’s chart can tell you that this $127 billion tech giant isn’t being held down by the high correlations in this market. Yesterday, shares broke out above $23.50 on good earnings, making their way above a critical resistance level. $23.50 was a critical price because it has been a barrier to price action each time Intel had tested it in the last two years; the breakout above that price yesterday told us that buyers had finally wrestled control of this stock away from sellers.
Now the stock’s at a two-year high, a psychologically significant place for shares. When shares are at a new high, suddenly the market dynamics change. At this level, everyone who’s bought shares in the last couple of years is sitting on gains -- and sellers become less eager to unload their shares. For that reason, Intel’s momentum is worth watching right now.
Because shares gapped higher at yesterday’s open, today’s price action will be important in dictating an entry strategy for this stock. Ideally, we’ll want to buy shares on the next white bar day -- it’s entirely conceivable that this stock could throw back to test newfound support at $23.50. If that happens, be a buyer on a bounce off of that level.
Either way, I’d recommend putting a protective stop just below that $23.50 level.
We can’t talk about significant moves in stocks without looking at Apple (AAPL). Yesterday, shares closed almost 5.6% lower on earnings that failed to live up to expectations -- a realization that sent a shockwave through Wall Street. How is it possible that everyone’s favorite stock could deliver a miss?
Frankly, it had more to do with analysts’ lofty expectations than it did with Apple’s ability to sell iPhones and Macs. I’ve talked at length about my views on Apple’s fundamentals -- but we’re here to talk technicals today.
Apple has established an uptrending channel, a dynamic support and resistance level that’s bounded shares since the beginning of July. The firm’s earnings stumble bounced shares beck down toward the middle of that channel. That means that Apple still has significant support under foot -- it’s just a matter of finding it.
The 50-day moving average and the thick blue trend channel support line are the two likeliest reversal points for Apple. I’d be a buyer of the stock’s next bounce higher off either of those levels.
In some cases, it’s alright for stocks to be highly correlated with the broad market -- Travelers (TRV) is a good example of that. Like the S&P 500, this stock has been in a sideways consolidation channel since early August, bound by $52 resistance and support at $46.
Along the way, this stock has been giving hints at an upside breakout bias: positive divergence in the 14-day RSI and better-defined resistance than support were a couple of early indications that buyers were gaining the upper hand in shares. Not surprisingly, it was earnings that actually spurred the breakout above that $52 resistance level.
Normally, a clear breakout like that would be a buy signal, but the fact that this stock rallied close to 6% yesterday is concerning. With resistance coming into play at the 200-day moving average, buying on a throwback down to the low $50s looks like a preferable trade right now.
Travelers show up on recent lists of 15 Cheap High-Dividend Stocks for Defensive Investors and Large-Cap Stocks With Room to Grow Dividends.
Royal Bank of Scotland
A similar setup is taking place in shares of Royal Bank of Scotland (RBS) -- except in this case, we haven’t see a breakout yet. That makes this stock worth watching right now.
Because a breakout hasn’t happened yet, RBS is currently forming an “if/then trade” -- that is, a setup where the ultimate trade direction is contingent on the price action in shares. To put it more clearly, if RBS breaks out above $8.50 resistance, then be a buyer. Otherwise, if shares tumble below $6.50, then this stock is a short candidate.
As with TRV, a positive divergence in RSI suggests that there’s some bullish bias in RBS investors right now. That’s not an excuse to be early on this trade -- waiting for a breakout in price action is crucial.
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.