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5 Big Stocks to Trade for Gains - 11811 views
BALTIMORE (Stockpickr) -- Stocks are pushing to regain last week’s high ground this morning, a difficult feat after Greek PM Papandreou yanked the rug out from under the eurozone with his referendum call. Even though the knock to the euro has had a negative impact on U.S. stocks this week, there’s reason to believe that it’ll be a short-lived.
We’ve already talked in the past about the obvious catalyst in corporate earnings -- and why it’s unlikely that investors will be able to shrug off a third consecutive quarter of good earnings news. But that’s only part of the equation.
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From a cyclical standpoint, seasonality is on bulls’ side as well. Historically, the span from mid-October through January is the strongest four-month period for stocks -- and we’re a stone’s throw from an election year, another time period that historically comes with outperformance. To take advantage of tailwinds in stocks, let’s take a look at technical trading setups forming in a handful 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.
Brazilian supermajor Petrobras (PBR) has been having a rough year in 2011. With oil prices under pressure from a weak economy, this stock has shed 29% of its value year-to-date. But that could be about to chance as Petrobas finds a bottom. Here’s how to trade this commodity name.
For most of October, Petrobras has been forming an inverse head-and-shoulders setup, a technical formation that’s market by a major trough with minor troughs on either side. It’s a setup that indicates exhaustion among sellers -- and that’s exactly what we’re seeing in PBR. The setup triggered late last week when PBR broke out through its neckline level -- while the breakout has already occurred, a throwback in stocks is providing investors with a second chance at entering shares.
A throwback is essentially a stock’s return to test newfound support at its previous breakout level. Not only do throwbacks provide a second low-risk entry on a stock that’s broken out, they also add extra confidence to the strength of the support level (at $25 in the case of Petrobras). Momentum, as measured by the 14-day RSI, has been providing bullish confirmation of an upside move -- a welcome added bullish signal in this stock.
If you take this trade, I’d recommend sticking a protective stop just below the right shoulder at $23.
Petrobras is one of the top holdings of George Soros as of the most recently reported period, with a 1.1 million-share position.
PowerShares QQQ Trust
There’s been a lot of attention on the tech sector lately -- and for good reason: With equity correlations around 75% right now, most stocks are trading in lockstep with one another. The fact that the tech sector has been less correlated makes it a much better place to find trading opportunities. The perfect way to play it is the PowerShares QQQ Trust (QQQ), a $48 billion ETF that tracks the Nasdaq 100 Index.
Relative strength has been very bullish for QQQ in the past several months, which historically is an indication that this index should continue to outperform the S&P 500. This ETF currently has a strong resistance level at $59 that’s being tested. Traders should be looking for a breakout above that price as a buy signal.
The abundance of support levels below QQQ’s current price makes the risk/reward tradeoff all the more attractive right now. If you decide to take a trade on tech, I’d recommend placing a protective stop under the 200-day moving average after the ETF pushes above $59.
Microsoft (MSFT) is a good example of a setup that’s taking shape in an individual technology name. This software giant has been trading sideways for months now -- but a bullish ascending triangle points to upside in this stock.
An ascending triangle is a trading setup that’s characterized by horizontal resistance above share prices (at $27.50 for Microsoft), with uptrending support below. That uptrend indicates upside bias in Microsoft shareholders. As Microsoft’s share price bounces in between those two technically relevant levels, shares get squeezed closer to a breakout above that $27.50 level. That’s the trading signal that tells market technicians to buy shares of this stock.
As with the QQQ, a logical protective stop level comes just below the 200-day moving average. It’s the meaningful support level that’s closest to the breakout level at $27.50.
Computer graphics company Nvidia (NVDA) is another example of a technology stock that’s providing less correlated trading setups right now. In Nvidia’s case, it’s an “if/then trade” that should be catching traders’ attention right now.
Put simply, an if/then trade is a contingent setup whose direction is dictated by the price action of Nvidia’s shares. With Nvidia’s prices locked in a horizontal trading range for the last few months, we’re looking for a breakout outside of the channel to take a trade. In other words, if shares of Nvidia break above $16 resistance, then buy. If shares fall below $12 support, then this stock becomes a short candidate.
While if/then trades normally don’t come with directional bias, the uptrend in RSI does point to an upside breakout. That doesn’t mean that it makes sense to take a position before the breakout happens, but it does add assurance to a buy signal when a breakout above $16 does happen. Either way this trade pans out, I’d recommend keeping a protective stop back just within the channel.
Last up this week is MasterCard (MA), the $45 billion payment processing firm. MasterCard has been having a banner year in 2011, with shares up nearly 60% in the last ten months. Even so, yesterday’s breakout in shares points to even higher ground for this stock.
Yesterday, shares of MasterCard confirmed a breakout above the $350 level that served as a neckline for a nested inverse head and shoulders setup (much like the one in PBR) that had formed near the top of MA’s price range. While that setup is still within MasterCard’s uptrending channel, it has the potential to push shares above uptrending resistance -- a bullish move.
The fact that shares are sitting at an all-time high adds psychological fuel to the rally. Because everyone who owns shares of MA is sitting on gains right now, selling pressures are less subdued than they would be if a contingent of investors were trying to pare losses or get back to even.
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.