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BALTIMORE (Stockpickr) -- As Mr. Market gives back some of his early week gains this morning, investors are going to be eyeing the data.
The first trading week of 2012 is already shaping up much the same as an average week in 2011: with a couple of steps forward followed by a couple of steps back. A more decisive direction for stocks could come from data. It’s Thursday, which means that a slew of new data is hitting Wall Street this morning. From this morning’s jobless claims numbers to the Fed’s balance sheet after the close, the way stocks react to key data points is going to be a big hint about what kind of performance investors can expect in the first quarter of the new year.
At the same time, we’re looking for more technically driven trading opportunities forming in a handful of the biggest stocks.
If 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 Noble Energy (NBL), a $17.4 billion oil and gas exploration company that’s riding the wake of a strong 2011. In the past year, shares of this energy firm have rallied 14.5%. Now a bullish setup in shares points to additional upside in 2012.
Noble is forming an ascending triangle setup, a technical pattern that’s identified by horizontal resistance to the upside and uptrending support below shares. The buy signal comes when that resistance level -- $100 in Noble’s case -- gets taken out by shares. While the shallowness of Noble’s triangle (caused by the low slope of the stock’s uptrending support level) detracts somewhat from the setup, the trading implications remain the same: a push above $100 would be a strong signal to buy shares.
A $100 share price (sometimes called a century mark) is also an important psychological level. Because it’s a round number, it a price that gets shareholders’ attention and makes them reevaluate whether or not it makes sense to own shares at that level. For that reason, it’s common to see $100 act as resistance -- and once that $100 price has been eclipsed, it’s just as common to see it act as a support level for shares.
SPDR Dow Jones REIT ETF
Another example of an ascending triangle is shaping up in shares of the SPDR Dow Jones REIT ETF (RWR), an exchange-traded fund that gives investors exposure to a basket of real estate investment trusts, better known as REITs. The combination of tertiary real estate exposure and a 3.18% dividend yield have made this fund a popular choice for investors looking to avoid the high correlations of the stock market. Now this setup points to upside in shares.
RWR is testing $65 resistance this week, bumping its head on that level earlier in the week before falling lower in yesterday’s trading. A second attempt at that price level could potentially yield a breakout -- investors would be wise to keep their eyes on this stock for the next few days.
Meanwhile, momentum, as measured by 14-day RSI, remains in a strong uptrend. That factor provides solid confirmation to the upside potential in this stock. Indicators aside, a breakout above $65 is required to make RWR a high probability trade.
On the other side of the spectrum is Alcoa (AA), the $10 billion aluminum producer that officially kicks off earnings season on Monday when it announces its fourth-quarter earnings numbers to Wall Street. For the last several months, Alcoa has been forming the bearish opposete of the setup in NBL and RWR: a descending triangle.
But the setup never triggered by breaking through support at $8.50. Instead, shares broke though the other side of Alcoa’s setup, pushing through downtrending resistance and effectively aborting the descending triangle pattern. In this case, a failed bearish pattern is every bit as actionable as an outright bullish pattern.
Alcoa’s Jan. 9 earnings date adds considerable uncertainty to this trade despite the breakout. I’d recommend traders with a higher risk tolerance take a starter position on Alcoa’s next white bar day, then wait for earnings to push shares through their next resistance at $10 before scaling to a full trade.
Things aren’t looking quite as directional for oil site servicer Schlumberger (SLB), a stock that’s managed to drop more than 16% in the past year -- at the same time that its clients have been rallying on strength in oil prices. Schulberger isn’t looking ostensibly bullish or bearish right now. But there’s still a trade to be made in this stock.
Since the middle of October, Schlumberger has been consolidating in a sideways range, setting up a textbook “if/then trade” in shares. Simply put, this stock’s if/then setup works like this: If shares break out above $77.50 resistance, then buy. If shares break down below $65 support, then SLB is a short candidate again.
The fact that RSI is perfectly neutral right now means that this stock has ample room to move before becoming either overbought or oversold. When the breakout does happen, I’d suggest placing a protective stop just back within the channel.
Schlumberger shows up on recent lists of the 7 Best Long-Term Stock Picks by Morgan Stanley and 15 Stocks to Ride the Energy Boom of the Next Decade.
Yahoo! (YHOO) is another example of a large stock that’s worked its way into a sideways consolidation channel, providing a set of trading implications that are identical to those in Schlumberger. In Yahoo!’s case, the resistance level to watch is at $16.50 and support is at $14.75. A breakout beyond either of those prices is a signal to take a position in the direction of the move.
While Yahoo! is consolidating near the top of its range right now, the fact that RSI has gotten the wind knocked out of it suggests that the upside momentum has attenuated. The well-defined channel that Yahoo! is currently in tells traders that there’s a large pocket of demand under $14.75 and a large pocket of supply of YHOO shares above $16.50. I wouldn’t recommend making a bet on this stock until one of those pockets gets absorbed by traders.
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.