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BALTIMORE (Stockpickr) -- It’s data dump Thursday, perhaps the only antidote to the extremely low-volatility market conditions Mr. Market has been plagued with since the start of February.
The S&P 500 has been locked in a tight range since the beginning of the month, driving the VIX Volatility Index down to its lowest sustained levels since last July. It’s somewhat ironic that the high levels of volatility that made the broad market untradeable in the fourth quarter of 2011 are being followed up by extreme lows in volatility now, but either way, traders aren’t laughing.
Of course, we’re not far off from seeing a more tradable market this month. The S&P’s current consolidation range has strong resistance right at the 1350 level, and a push above that price would take out a major hurdle for this rally.
So could “Data Thursday” do it?
Maybe. Traders are weighing everything from jobs, housing and inflation to money supply data and Fed Chairman Bernanke’s speech this morning; if the fundamentals are going to drive a technical break, now’s as good a time as any. That’s why we’re watching the techincal setups in five of Wall Street’s biggest names this week.
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, I just can’t stop talking about Apple (AAPL). We last looked at this stock in this column two weeks ago, where I recommended overlooking Apple’s lumbering size to take an attractive secondary breakout above the S1 level.
That price ended up being a more significant resistance level than expected, and after a throwback to retest newfound support at S1, shares of this tech giant went parabolic, providing 11% gains in two weeks for traders who took advantage.
So is it still time to buy shares of Apple? Not now.
Apple looks pretty overbought right now, particularly after what looks to be a key reversal day in yesterday’s trading. I still like Apple’s fundamentals, but I’d strongly recommend waiting for shares to reach some semblance of a support level before adding onto a position in shares. S1 is currently our closest (known) support level in this stock -- that means that investors who buy at these prices are exposing themselves to huge downside risk in February.
Ideally, Apple will consolidate around its highs and bleed off some of that overbought momentum. I’d wait for a break above that consolidation before considering buying. Traders who held onto shares may want to take gains.
PowerShares DB Oil Fund
A lot of investors have been paying attention to oil prices lately -- and for good reason. Crude prices have been flirting with triple digits for most of the last year, threatening to impact consumer pocket books and offering to ratchet margins higher for companies in the oil business.
That’s why the first name we’re looking at today is the PowerShares DB Oil Fund (DBO), an ETF that’s designed to mirror the performance of crude oil.
DBO has been forming a bullish ascending triangle setup for the past several months, formed by horizontal resistance at the $30 level and uptrending support to the downside. Essentially, as shares bounce in between those two technically relevant levels, they’re getting squeezed closer and closer to a breakout above that resistance level. A breakout above that price level sends a strong buy signal to traders.
From a technical standpoint, then, there’s significant potential for increased upside in oil prices in 2012. Funds like DBO are a good way to hedge against the potential inflation implications of higher crude prices. Rather than just buying the fund now, it makes sense to wait for the breakout above $30 to get a higher-probability of upside. When that happens, put a protective stop at the 50-day moving average.
A similar setup is forming right now in shares of health insurer Cigna (CI). Cigna is forming an ascending triangle bottom with resistance at the $47 level, a price that’s acted as an upside barrier for shares the last four times buyers tried to bid priced higher. That barrier at $47 tells us that there’s a glut of supply of shares above that price level.
In other words, $47 is a price where sellers are more willing to sell and take gains than buyers are to buy. A breakout above $47 indicates that buyers have absorbed the excess supply above $47, and that the barrier no longer exists.
Adding some extra confirmation to the setup in Cigna is momentum, as measured by this stock’s 14-day RSI. That RSI line has been in an unbroken uptrend since the broad market bottomed in August, a bullish sign that adds some evidence towards a breakout in CI.
Like DBO, Cigna’s logical place for a protective stop is the 50-day moving average.
ProShares Ultra 7-10 Year Treasury ETF
We’ve taken a look at commodities and stocks, how about a look at another asset class that’s been getting a lot of investor attention in the last few months? I’m talking about treasuries. Normally considered boring, treasuries have been anything but in the last year, rallying double-digits as investors unloaded their stock positions in favor of what are essentially risk-free assets.
Now the big question is whether there are still gains to wring out of this market. For exposure to treasuries today, we’re taking a look at the ProShares Ultra 7-10 Year Treasury ETF (UST), one of the most popular names on TheStreet this week.
At first glance, while UST looks like a similar setup to the ones in DBO and Cigna, one of these triangles is not like the other. That’s because UST has some important structural challenges that override an otherwise attractive technical setup in shares.
One of the big benefits of technical analysis is the fact that it works on any asset whose price is determined by supply and demand. But there’s another factor impacting treasury prices: as treasury prices ratchet higher, the yields they pay become infinitesimally small (very short-term yields can even turn negative for very, very short periods of time).
Because treasuries are fixed income assets, there’s a natural aversion to perceived unsustainably high levels. As a result, UST’s ascending triangle shouldn’t be treated like the other two I just showed you.
While a breakout above the $108 resistance level may be a good buying opportunity for a day trader, longer-term traders should just treat that level like a structural barrier rather than a supply or demand-driven barrier for price.
Dublin-based building materials manufacturer CRH (CRH) has had some fairly poor performance in the last year. While the broad market is slightly up in the last 12 months, CRH is down close to 13% over that same time period. But shareholders should find some solace in the technicals forming in shares right now.
CRH has been locked in an uptrending channel since late September, bounded by a trendline support level that’s been tested four times, and two return lines at R1 and R2. While the existence of those two trend line resistance levels makes CRH look like a potentially more complicated setup, the trading implications on this name are fairly straightforward: traders should be looking to buy a bounce off of trend line support as CRH makes another move up its channel.
R1 is a good high probability price target for risk-averse traders. The more risk-hungry can hold out for a lower-probability breakout up to the R2 level. Either way, it’s critical to actually wait for a bounce off of support before buying; support levels do eventually fail, so we want to get confirmation that it’s still a valid price floor before buying.
To see this week’s trades in action, check out the High Volume Technicals portfolio on Stockpickr.
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.