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BALTIMORE (Stockpickr) -- Price action in other markets -- namely eurozone debt and oil -- is driving the volatile open in stocks this morning.
Stocks are swinging today on the call that Europe may be in for a recession in 2012. At the same time, bond traders are ratcheting pricing down to a new level of craziness by pricing Spain's debt with nearly the kind of yields being seen in Italy right now, never mind the fact that Spain's debt-to-GDP is half that of Italy's. That disconnect tells us that the market is seriously concerned about contagion, and it creates an attractive trade (long Spanish, short Italian sovereigns) right now.
Oil is another market that's getting a lot of attention right now. Yesterday, prices broke through the $100 level on declining supply reports, shooting crude to it highest levels since the start of the summer. That $100 level (also known as a century mark) is an important psychological price for investors -- and it's right below an important resistance level in light sweet crude futures. Crude is bouncing hard off of that resistance level this morning.
Even though the stock market is playing catch up to those more macro markets, there's still compelling action taking place in stocks. At this writing, the S&P 500 looks likely to retest support at 1225 today, an important level that could spur an upside bounce. That's all the more reason to pay attention to technical trades forming 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.
It makes sense to start off with tech sector darling Apple today. Apple has been a clear momentum winner this year, rallying more than 20% on the year on the heels of record sales and "Wall Street darling" status. But a slowdown in Apple has some investors concerned that the company could be headed lower.
While it's true that Apple's trajectory slowed earlier this summer, the stock is still looking bullish from a technical standpoint. Apple entered an uptrending channel at the end of July, bouncing off of trendline support and resistance as the stock works its way up the channel. With Apple bouncing off of support this week, investors could be looking at an optimal entry for this stock.
Apple's channel also provides a well defined price target as shares approach trendline resistance -- short-term traders should look to unload their positions as shares get close to hitting their head on that level. From an entry standpoint, I'd recommend waiting for Apple's next white bar day, then buying shares. Keep a protective stop just below that lower trend line.
For a fundamental argument for Apple's shares, check out 6 Cash-Rich Stocks to Buy Before 2012.
Recent initial public offering Groupon has been Wall Street's biggest new issue in recent months, the latest social media name to capitalize on its popular brand and open ownership to the general public. Typically, IPOs are a tricky animal to trade (check out this primer for more on trading IPOs), but this stock's short price history is providing some tradable levels at this point.
Right now, Groupon has ultimate support at its Nov. 9 low $22.76, and a stronger support level at $23.50. A crack of that support range makes Groupon a short candidate.
But there's a lot more to the story than that. Groupon only sold around 6% of the company in its IPO, resulting in a miniscule public float that's essentially creating an artificial floor in shares. Because Groupon's shares are hard to borrow, brokers are charging significant negative rebates to short the stock.
The floor in Groupon is likely to be temporary. While its float provides some protection from shorts, prices can still decline just as easily from longs eager to exit their positions amid waning demand. A breakdown below $22.76 is a good sign that that's taking place. When it happens, buying puts on Groupon provides a limited-risk alternative to bet on price decline.
Sprint is another name that's been in the financial headlines quite a bit in 2011, if only for its painful drop in value. To date, shares of this cellular carrier have slid more than 32% this year, as this firm (that was priced at $22 in 2007) sank below the $3 mark in September. But the fates could be reversing for Sprint shareholders right now.
That $3 level is significant. Back in early August, it acted as a strong support level for shares, and since the start of October, it's been a strong horizontal resistance level. It's also one of the two trend levels that make up the ascending triangle that's currently forming in shares of Sprint. That ascending triangle points to a trend reversal in shares of this stock, but only on a breakout above $3. That's the buy signal for traders.
14-day RSI, a measure of momentum, is confirming the triangle's uptrend and providing some extra confidence over this pattern's potential. Because momentum is a leading indicator of price, momentum confirmation is a very good thing to see for an upside breakout. After the breakout, I'd recommend putting a protective stop just below Sprint's uptrending support level.
Sprint was also featured this morning in " 5 Stocks With Big Insider Buying."
Another upside setup is taking shape in shares of Weyerhaeuser, the $9 billion forestry company based in Washington state. Shares of Weyerhaeuser are currently forming an inverse head-and-shoulders pattern, a bullish setup that indicates exhaustion among sellers. Seller exhaustion should come as a welcome change for Weyerhaeuser shareholders -- their positions have declined by 25% in the last six months.
The inverse head and shoulders points to a bottoming-out in this timber stock.
In an inverse head-and-shoulders pattern, the price level to watch is the neckline; it's the breakout price that provides a buy signal to traders. In Weyerhaeuser's case, that neckline comes in at $18 and completes the right shoulder in shares.
When the breakout happens, I'd recommend placing a protective stop at the bottom of that right shoulder, the 50-day moving average providing a good proxy for that price level.
As of the most recently reported quarter, Weyerhaeuser was one of the top holdings of John Paulson.
A good example of an inverse head-and-shoulders trade comes from last week's trade in Rite Aid, a setup that was in a similar state as Weyerhaeuser when we last looked at it. Ultimately, this trade produced a conservative 13% single-week gain.
Rite Aid's $1.20 neckline got breached on Thursday's close, but didn't become a buy signal until Friday's higher open. Friday became a huge day for Rite Aid, eventually trading up to the stock's previous resistance level at $1.38. Now, shares of Rite Aid are throwing back to retest their newfound $1.20 support level. A successful bounce off of that price level would act as a second chance to enter this retail pharmacy name.
Remember, if you opt to take this throwback trade, don't be early -- $1.20 needs to get confirmed by a bounce before Rite Aid becomes a buy again.
Rite Aid shows up on a recent list of 11 Stocks Under $11 for a Rebound.
To see this week's trades in action, check out the High Volume Technicals portfolio on Stockpickr.
-- Written by Jonas Elmerraji in Baltimore.