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BALTIMORE (Stockpickr) -- Stocks have settled this week, as investors absorb some of the wild price action that the previous two weeks have brought us. Since Monday, stocks have gained 1.34% -- a far cry from the rollercoaster-style swings traders have been getting used to. This morning’s flat open doesn’t look like it’s going to change that.
Another part of the reason for Mr. Market’s calming down this week is data. Investors are withholding their judgment on stocks until the next round of economic data gets released to Wall Street. It’s Thursday, which means that today’s sure to be a big day for data. An ECB interest rate announcement, jobless claims and the Fed’s money supply numbers are all likely to be market moving metrics today.
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From a technical standpoint, the broad market is reaching an important level right now: the sub-1300 resistance level in the S&P 500 that stocks hit their head on at the end of October. If the S&P can push through that level, the stage is set for a very attractive start to 2012. This week, we’ll take a look at five big names on Wall Street that could benefit from that.
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, technical analysis is 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.
First up this week is Itau Unibanco (ITUB), the $86 billion Brazilian bank. Even though ITUB is thousands of miles away from big domestic banks’ shenanigans, this stock hasn’t been spared from the selling that’s hit the financial sector -- shares of ITUB have slid 21% year-to-date. But the setup in ITUB right now suggests that it may have found a bottom.
ITUB is currently forming an ascending triangle right now, a setup that’s identified by a staunch resistance level to the upside (in this case at $19) and uptrending support below. Typically, ascending triangles are considered continuation patterns rather than reversal patterns, but in practice, it’s not uncommon to see triangles indicating a reversal. ITUB is a perfect example of that.
It’s important to remember that even though ITUB is within a hair’s breadth of $19 resistance this morning, it’s a price level that’s acted as a “ceiling” the last three times shares have tried to push through it. For that reason it’s crucial to wait for an actual breakout above $19 before becoming a buyer of this stock.
Chipmaking giant Intel (INTC) has shown tremendous relative strength lately, rallying 27% in the last quarter vs. a 3.5% gain in the S&P 500. Now the question is whether that outperformance can continue.
While stocks with high relative strength are statistically more likely to continue to outperform in the three-to-10-month timeframe, we need something more actionable to justify taking a trade in this stock. That actionable item is Intel’s test of $25.50 resistance this week.
Yesterday, shares broke out to a new 52-week high of $25.78, pushing through that $25.50 level in the process. Now it’s going to be important to watch whether Intel’s shares pull back. If shares can hold out above that $25.50 level, the buy signal for this stock comes on its next white bar day.
Pfizer (PFE) is another name that’s showing relative strength right now. Shares of Pfizer made a bottom back on Aug. 8 but didn’t retest it on Oct. 3 when the market made a new low, which indicated that buyers were still in control of this stock when the S&P was teetering. Since August, Pfizer has been locked in an uptrending channel, bouncing between the dashed trend line support and resistance lines in the chart above. Now shares are testing a double breakout.
It’s a double breakout because not only is Pfizer testing a push through its dashed trend line resistance level, the stock is also breaking out above it’s previous horizontal resistance level at $20.20. The key to whether this stock is tradable now becomes confirmation -- yesterday’s breakout is still too small to be considered statistically significant.
Confirmation in this stock comes on an open above $20.20 that pushes through yesterday’s highs. When that condition is met, it’s a safe bet that the excess of supply of Pfizer shares above that level has been absorbed by buyers. Afterwards, I’d recommend keeping a protective stop just below $20.
If this breakout isn’t confirmed, Pfizer is likely to make its way back down to trend line support.
Another pharmaceutical stock that’s showing breakout potential right now is Eli Lilly (LLY). Lilly broke out on Tuesday, pushing through previous resistance at $38.50, and the breakout was confirmed by yesterday’s open above that level – even if much of yesterday’s gains got given away by the close. So should you buy this breakout?
One major benefit to this setup in Lilly is the fact that $38.50 resistance is very well defined -- it’s a level that’s acted as a price ceiling the last three times shares have tested it, so the fact that shares held above that price yesterday indicates that the supply/demand equation for shares has shifted dramatically in favor of longs. Still, Lilly has moved enough off of that resistance level to warrant waiting.
Once broken, resistance levels act as support levels for shares. And it’s not uncommon to see a stock break out only to retest newfound support as it consolidates; it’s called a throwback. Throwbacks are good because they validate the strength of a price level we’re watching, and provide traders with a second low-risk entry for shares. I’d be looking for Lilly to throwback to support -- otherwise, if shares make their way higher than yesterday’s close, the upward trajectory looks likely to continue from here.
Either way, I’d recommend keeping a protective stop at the 50-day moving average.
Eli Lilly is one of Merrill Lynch's 10 Favorite Stocks for 2012.
Last up this week is General Electric (GE), a stock that’s been trailing the broad market for most of the year, even if it’s making up some of that lost ground this week. Right now, GE is showing traders an “if/then setup,” a contingent setup whose direction is dependent on which way shares break out of their sideways channel.
Simply put, GE’s if/then setup works like this: If shares break out above resistance (a range between $16.5 and $17), then buy. If shares break down below support (at $14.75), then GE is a short candidate. GE’s push into its resistance range yesterday adds some promise for longs, but realistically $17 is the more important barrier for shares to push through because it was set more recently. Until one of those conditions gets met, I’d suggest sitting on the sidelines with this stock.
When a breakout does happen, keep a protective stop back just within the channel.
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.