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BALTIMORE (Stockpickr) -- You hear that? It’s the sound of investor anxiety slowly retreating from stocks.
As impressive as this 2012 rally has been, it’s been marred by extremely high levels of investor anxiety that have threatened to derail the S&P 500’s climb every step of the way. Anxiety isn’t exactly an easy thing to measure -- while instruments like the VIX give some indication about investor anxiety, directional bias means that they’re a whole lot less effective during rallies.
But Treasuries do offer some clues about what people think about Mr. Market right now.
Typically during a rally, you’d expect Treasuries to sell off as investors shift their assets from the safety net of government bonds to the stocks that they’re growing increasingly confident in. But Treasuries haven’t really pulled back the way we’d expect them to this year -- and that’s finally changing.
Treasuries have fallen for seven straight days now in their longest losing streak since 2006. As investors sell their treasury positions, we’re getting a good indication that market participants’ anxiety about this rally is decreasing. And that flow of funds from treasuries to stocks could help propel this rally even further in the coming weeks and months. To take full advantage, we’re turning to the technicals in five of Wall Street’s big-name stocks 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.
We’ll start off this week with Exxon Mobil (XOM), the oil supermajor that until recently held the title of the biggest company in the world. Exxon has seen its share prices get pushed higher for months as the sustained high price of crude oil translates into higher profits for the Texas-based firm.
Right now, it looks like that upside action isn’t over.
Exxon Mobil is currently forming an ascending triangle setup, a bullish pattern that’s formed by a horizontal resistance level to the upside of shares and uptrending support below them. As XOM bounces in between those two significant price levels, shares are getting squeezed closer and closer to a breakout above that resistance level. When that happens, traders have a high-probability buy signal on their hands.
The resistance level to watch in Exxon right now is $88 -- it’s a price that’s acted like a “ceiling” for shares since last February. A breakout above that level would be a strong signal. When it happens, I’d recommend keeping a protective stop just below the 50-day moving average.
Bank of America
Bank of America (BAC) has been the bank everyone loves to hate for the past few years. But it’s hard to hate the performance this firm has been turning out lately. In the last six months, shares have climbed 25%, and zooming in closer, they’ve jumped almost 70% over a three-month time span. Clearly, there’s something going on in shares right now.
Much of BAC’s three-month rally came on the heels of a double-bottom pattern that triggered right at the start of 2012. From there, this stock has been consolidating in a channel, trading sideways as investors make up their minds about what to do next with BofA.
Apparently, the answer was buy -- shares of Bank of America broke out again above that resistance level on Tuesday, and confirmed the price break yesterday. That put BAC in rally mode and sent a “buy” signal to traders.
Momentum, measured by 14-day RSI, remains in an uptrend right now. Since momentum is a leading indicator of price, that’s a good sign for BAC longs in March.
Even though this stock has made some big moves in the last week, it’s still a buyable name.
Goodyear Tire & Rubber (GT) is forming a similar setup right now. With shares still sitting in their consolidation channel, it’s just a little less advanced than the one in Bank of America. For investors hoping to be early to the trade, that’s a very good thing.
Right now, Goodyear is consolidating in a horizontal channel that’s bounded by resistance at $15.50 and support at $12. Put together, this stock is showing us a classic example of an “if/then trade.”
An if/then trade works like this: If Goodyear breaks out above that $15.50 resistance level, then we have a buy signal (like the one in BAC). However, if shares break down below $12 support, then this stock becomes a short candidate. With shares testing support this week, the latter is a real possibility.
Momentum is coming into play again in GT. A trend line break in RSI back in February sent an early warning that this stock could be about to turn lower. Since that new downtrend remains in force, a breakout is a real possibility in spite of the rally that the rest of the market is enjoying this year.
Still, it’s crucial to wait for the actual breakout to happen. Until then, this isn’t a high-probability trade.
Another if/then trade is taking place in shares of Vale (VALE), a $119 billion metals and mining company. Vale has been stuck in a sideways channel for the better part of the last six months, trading in a range between support at $21 and resistance at $27 – just like in Goodyear, the trading signal (and direction) comes when shares actually make a move outside of that channel.
One thing worth noting about Vale is the fact that its pattern resembles another popular technical pattern right now: an inverse head and shoulders. The trough in shares at the start of 2012 could potentially be the pattern’s inverse head, which would mean that we’re currently in the process of forming a right shoulder. So if this pattern does end up forming, what does that mean for trading Vale?
The inverse head and shoulders is a bullish setup, but as I’ll show you in a second, the breakout signal comes on a move above $27 -- so the buy signal for either the if/then trade or the inverse head and shoulders is identical. Either way, trade it the same.
Icici Bank Limited
Last up is $22 billion Indian bank Icici Bank Limited (IBN), a stock that’s forming a more clear-cut example of an inverse head and shoulders setup. Icici's pattern is more clear-cut for a couple of reasons: First, this stock’s head extends more definitively beyond the troughs formed by each shoulder, and second, the right shoulder is further along in development. The buy signal comes on a push up through the $40 neckline level -- that price corresponds to $27 in shares of vale.
Even though the head-and-shoulders (and its inverse) is likely the most well known technical pattern, it’s still a valuable one: an academic study conducted by the Federal Reserve Board of New York found that the results of 10,000 computer-simulated head-and-shoulders trades resulted in “profits [that] would have been both statistically and economically significant.”
That’s a good reason to keep an eye on IBN this week. When the trade triggers, I’d recommend keeping a protective stop just below $34.
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.