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BALTIMORE (Stockpickr) -- It’s data Thursday -- and that means that economic data is getting the spotlight today as investors search for the next direction in stocks.
This morning, jobs, inflation and trade numbers have already hit Wall Street, with the trickle of information set to continue throughout the day. But economic stats are only part of it; a new earnings season is also underway this week. Those earnings numbers have the biggest potential to reignite the stock rally in April, particularly with the poor expectations analysts have laid out for the first quarter of 2012.
From a technical standpoint, Mr. Market is down but not out. While this latest pullback is deeper than the one we saw in March, the uptrend in the S&P 500 is still intact. That gives traders reason to get ready for another leg of this rally -- and reason for us to take a technical look at 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 this week is Talisman Energy (TLM), a $12 billion oil and gas company that’s put up some less-than-impressive numbers so far this year. Since the first trading day of January, shares of Talisman have shed 5.4%, versus gains of close to 9% from the S&P.
But TLM is showing some signs of a potential turnaround in April.
Right now, Talisman is forming an ascending triangle bottom, a pattern that’s formed by horizontal resistance to the upside and uptrending support acting as a sort of price floor for shares. As TLM’s price bounces in between those two technical levels, shares are getting squeezed closer and closer to a breakout above $14.50 resistance.
That breakout is a buy signal for shares.
Momentum adds some extra evidence in favor of a breakout in TLM. With the uptrend in this stock’s 14-day RSI still intact, Talisman is showing traders some upside bias right now.
Don’t be early on the TLM trade. Wait for a breakout above $14.50 before becoming a buyer.
Talisman shows up on a list of Energy Stocks Bought and Sold by Hedge Funds in the most recently reported quarter.
Tweak the trading pattern in TLM a bit, and you’ve got the setup that we’re watching in shares of American Tower (AMT). Instead of horizontal resistance and uptrending support (a combination that makes an ascending triangle pattern), AMT is trading in a sideways channel with horizontal resistance and support right now. That lack of a trend direction in the setup means that traders in AMT don’t have the same directional bias that they do in Talisman Energy.
But there’s still a trade to be made on this stock: an “if/then trade.”
Essentially, the if/then trade works like this: If shares break out above resistance at $64, then AMT sends out a buy signal. Otherwise, if shares break down below support, then AMT is a short candidate. Either way, this trade eventually works out, I’d suggest keeping a protective stop just on the other side of the 50-day moving average.
Verizon (VZ) is another name that’s showing us an if/then trade -- at least at this point. Verizon put in two tops at the $39.50 resistance level in the past few months, along with finding support twice at $36.75. At this stage in the game, it looks like Verizon is a typical if/then setup, although a breakdown below $36.75 now would make this pattern look more like a classic double top.
Here’s the thing: It really doesn’t matter which one Verizon is. That’s because either way, the short signal comes on a break below that $36.75 level. Individual patterns are great ways of categorizing stocks technically, but ultimately, it’s not the trading pattern itself that puts gains in your portfolio, it’s the market factors that are making those patterns work.
In this case, the glut of demand for shares below $36.75 has propped Verizon up when shares attempted to move lower. A break below $36.75 tells us that the demand there has been completely absorbed by more aggressive sellers, a solid short signal.
I’d suggest also keeping a close eye on that $39.50 level, though -- especially if the broad market is kicking off another leg of the rally this week.
I also featured Verizon recently in "10 Dow Dogs That Are Barking for Gains."
Office product retailer Staples (SPLS) is offering up a pretty straightforward pattern this week, as shares bounce higher within their trend channel. Staples has been locked in its channel since the end of August, when market volatility was skyrocketing and trading conditions were markedly different than they are now. In April, traders could be looking at an opportunity for an optimal entry in this stock.
You can think of Staples’ trend channel like any other trading channel -- it’s a range that’s bounded on either side by a dynamic support and resistance level. Those two levels tell traders a great deal about the high-probability moves that Staples is likely to make.
Now, with this stock testing trend line support, it makes sense to buy on a bounce in hopes that SPLS will climb back up the channel.
Waiting for the bounce is critical when you’re trading stocks in a channel. Ultimately support and resistance levels do eventually fail, and you don’t want to be left holding the bag if support can’t hold up here for Staples. By waiting for the bounce, you get to see if there’s still a glut of demand propping up share prices at support before you put your money on the line.
Staples shows up on a recent list of 10 Stocks That Fidelity Funds Are Buying.
Macy’s (M) is stuck in a similar setup right now. Like Staples, Macy’s has been bouncing within its channel since August, climbing more than 63% since the middle of that month. A return to trend line support this week could be an optimal entry in this stock.
Macy’s hasn’t had as many successful tests of support as Staples has. Successful tests of support are a good thing because they clue us into the strength of that trendline support level. For that reason, it’s important to get a stronger bounce off of support than we’d want to see in Staples. Today’s trading session could provide that.
It’s also important to keep an eye on the converging dashed trend line in the chart above; it’s been acting as trend line resistance since early November, and could reign in some of Macy’s upside potential. That said, a shove above the dashed line is likely to accelerate this stock’s climb.
If you decide to be a buyer here, I’d recommend keeping a stop on the other side of the 50-day moving average.
As of the most recently reported quarter, Macy's is one of the top holdings at David Tepper's Appaloosa Management.
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.