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BALTIMORE (Stockpickr) -- How long is this rally really going to last? With stocks at four-year highs right now, investors are starting to look for the black clouds.
Losses in the eurozone could drag stocks down here at home today, forcing the S&P 500 to test the strength of the 1400 level that it’s been holding since Friday. While that level of selling doesn’t have any longer-term implications for us, sentiment is still worth keeping an eye on this week.
At this point, though, stocks are still majorly in favor, so 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.
First up is American Tower (AMT), a $25 billion communication infrastructure firm. American Tower has been moving higher for the last six months or so, slightly besting the performance we’ve seen from the S&P over that same period. But it’s not the size of the move that’s impressive -- it’s how AMT has climbed that’s providing a trading opportunity this week.
Over those last six months American Tower has been locked in an uptrending channel, a setup that’s constrained AMT’s rally between a dynamic support and resistance level. The most significant part about an uptrending channel is the fact that it gives us expectations. Because we know where AMT’s price action should stop and reverse as it bounces inside of the channel, we can take advantage of high probability trades in this stock.
For an uptrending channel, the ideal time to buy comes when shares bounce off of trend line support, the bottom line in the chart that’s essentially acted as a floor for AMT’s price action. I’d strongly recommend for the bounce to actually happen before buying. Then consider a protective stop below the 50-day moving average.
BRF Brasil Foods
Things have been less exciting this year for shares of Sao Paulo-based food processing company BRF Brasil Foods (BRFS). So far this year, shares of the $18 billion firm have only managed to climb 5% while Mr. Market has managed to rally more than twice as high.
Although this stock is moving sideways right now, a technical pattern forming in shares indicates that bulls could soon be rewarded for their patience.
Brasil Foods is forming an ascending triangle setup right now, a bullish formation that’s identified by a horizontal resistance level above shares and uptrending support below them. As BRFS bounces in between those two technically significant price levels, shares get squeezed closer and closer to that resistance level (at $21.50 in this case), increasing the possibilities of a breakout. A break above $21.50 is the buy signal for BRFS.
When trying to understand the ascending triangle, it makes sense to think in terms of supply and demand. There’s a big glut of supply of shares above $21.50; in other words, it’s a price above which sellers are more eager to sell and take gains than buyers are to buy. We know that because price has reversed each of the last five times it’s reached that level -- a breakout sends the signal that buyers are in control of BRFS.
With a “price ceiling” taken out, that’s the time to be a buyer.
BRF Brasil Foods shows up on a list of 10 BRIC Stocks for 2012.
Meanwhile, the exact opposite setup is taking place in shares of aluminum giant Alcoa (AA).
Alcoa is forming a descending triangle, the bearish opposite of the ascending triangle we just saw in BRFS. A descending triangle is identified by horizontal support and downtrending resistance -- so in this variation of the pattern, resistance is squeezing shares closer and closer to a breakdown below support.
Putting this trade back in terms of supply and demand, there’s been a glut of demand at $8.50 that’s previously propped Alcoa up. A push below that price indicates that the demand’s no longer there -- if it was, bargain-hungry buyers would quickly absorb any selling that came near that level. That’s why it’s crucial to wait for the breakdown below $8.50 before taking a position; it’s the breakdown that tells us something big has changed below $8.50.
So if AA fails to hold $8.50, this stock becomes a short candidate. If not, it’s not a high probability trade.
I’d recommend keeping a protective stop around the 50-day moving average.
Alcoa shows up on a list of 6 Stocks Driving the Economy in 2012.
Microsoft (MSFT) is another name that traders should be keeping an eye on for bearish cues right now. This $268 billion tech behemoth has climbed nearly 23% so far this year, buoyed by a combination of good fundamental performance and agreeable market conditions. Now, though, this chart is looking a bit “toppy.”
In fact, shares could be forming a head and shoulders top right now.
The head and shoulders is a pattern that indicates exhaustion among buyers. It’s formed by two intermediate peaks (the shoulders), which are separated by a bigger peak (the head). Right now, Microsoft has a left shoulder and a head; it’s just missing the right shoulder.
While MSFT could possibly continue to move higher from here, the short signal comes on a breakdown below the neckline at $31.50. That’s when it’s time to bet against shares.
Even though the head-and-shoulders 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.” Watch that neckline in the near-term.
Bank of America
Finally, I want to take a minute to recap the Bank of America (BAC) trade from last week’s column. BofA is another name that’s been rallying hard in 2012, taking advantage of oversold conditions at the start of the year to propel its shares now that Mr. Market has become a bit friendlier to the financial sector.
Last week, we were looking specifically at the breakout shares made above the top of their consolidation channel at $8.25. The bottom line was that “even though this stock has made some big moves in the last week, it’s still a buyable name.” Since then, shares have climbed another 12.6% for buyers who decided to buy the breakout.
If you still own shares at this point, BofA is still looking strong. While investors should expect BAC to pull back along with the rest of the market this morning, a test of the psychologically important $10 mark could be big. Squeamish traders should unload on a break below $9.50.
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.