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BALTIMORE (Stockpickr) -- Sure enough, the three biggest fundamental drivers for the market this week are earnings, earnings and earnings.
All told, 91 S&P 500 stocks are slated to announce earnings this week – almost 20% of the broad market index. And of the 50 that have already reported numbers this earnings season, 41 have beaten analysts’ expectations. Even so, momentum in the 2012 stock rally has been cooling since the start of April.
Those facts tell us two very important factors about the market right now: First, Wall Street is definitively underestimating corporate profits this quarter, and second, market prices are starting to fall out of synch with fundamentals.
So, with those fundamental drivers clearly not working like they should in April, it makes more sense than ever to take a technical look at how the biggest names on Wall Street are trading right now.
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 retail behemoth Wal-Mart (WMT), a stock that’s been on the heels of a strong rally in the last year. Wal-Mart’s shares have climbed 15% in the past 12 months, offering investors nearly triple the returns of the S&P 500 over that same period. And right now, the technicals point to bigger gains in the near-term.
That’s because Wal-Mart is currently forming an ascending triangle pattern, a setup that’s formed by a horizontal resistance level to the upside, and uptrending support below shares. Essentially, as WMT bounces in between those two technical levels, it’s getting squeezed closer and closer to a breakout above that $62.50 resistance level; that breakout is our buy signal for shares.
Momentum, as measured by 14-day RSI, adds some extra confidence in this setup -- it’s been trending higher since the ascending triangle started forming at the start of last month. Volume is textbook in shares of Wal-Mart too. Trading activity has been declining throughout the pattern, something that’s actually a positive sign; we’ll want to see a volume spike on the breakout as traders participate in the move higher.
Ultimately, those supporting factors add confidence to the pattern, but it’s crucial to wait for price to move above $62.50 for WMT to become a high probability trade.
A similar setup is forming in shares of China Mobile (CHL), the world’s largest cellular phone carrier. Like Wal-Mart, CHL has been handily beating the broad market in the last 12 months, rallying 17% over that period. Also like Wal-Mart, an ascending triangle pattern points to additional upside in shares in the near-term.
In China Mobile’s case, resistance isn’t quite as clear cut as it is for WMT. Instead of a single resistance level, CHL currently has resistance in a range between $55 and change and $56. The presence of that range complicates things a bit -- it makes a clear-cut breakout signal a lot harder for traders to process, especially now, with shares testing the lower bound of that range.
I’d recommend scaling into a “test position” as shares push through that resistance line just over $55, then ramping up to a full-sized position on a break above that dashed $56 line. If you do decide to take the trade on CHL, I’d recommend keeping a protective stop just below the 50-day moving average -- it’s mimicking that uptrending support level right now.
Petrochina (PTR) is another big name that’s hitting our radar this week thanks to a technical setup in shares. In the very short-term right now, PTR is forming a double bottom pattern -- one that points to a climb in shares if this oil stock can hold above $144 resistance in today’s market session.
A double bottom is a pattern that occurs when a stock hits support with two well-defined swing lows right around the same price level. For PTR, those came in late March and early April right at the $137.50 level. The strength of that support level gives us an important clue about what’s going on behind the scenes at PTR -- we know shares can catch a bid at $137.50, so a break above resistance at $144 tells us that buyers are definitively in control of shares again.
PTR’s second resistance level at $152.50 looks like a likely price target for the move past $144. If PTR can hold $144 today, I’d recommend buying with an exit plan in place to either take gains at $152.50, or, worst-case scenario, to get stopped out at $140.
Analog Devices (ADI) is providing traders with a much less directional technical outlook right now, but there’s still a trade to be made in this stock.
ADI is currently stuck in a sideways consolidation channel, bouncing around in between resistance at $40.50 and support at $37.50. That bouncing tells us something important about ADI – it tells us that there’s currently a glut of supply of shares above the channel, and a glut of demand for shares below it.
It follows, then, that a break outside of the channel (in either direction) sends an important signal to traders; it lets us know that the glut has been absorbed by the people on the other side of the trade.
That’s the classic example of an if/then trade. Put more simply, if ADI breaks out above $40.50, then we’ve got a buy signal. Otherwise, if ADI breaks down below $37.50, then this stock is a short candidate. Either way this setup eventually pans out, I’d recommend keeping a protective stop right on the other side of this stock’s 50-day moving average.
Analog Devices shows up on a recent list of 5 Chip Stocks JPMorgan Likes.
Last up this week is toy maker Mattel (MAT), a stock that didn’t win any new friends when it posted negative earnings surprise at the start of this week. But even though MAT missed Wall Street’s profit estimates, shares are looking bullish right now.
While earnings did gap shares down below their 50-day moving average, the move wasn’t technically significant. The 50-day hadn’t been acting as any sort of important support level, and the gap down didn’t send shares below the trend line support level that has acted as critical support since the start of August. Instead, it send MAT to test that level -- and reaffirm that shares can still catch a bid at support.
When a stock is trending higher in a channel, as Mattel is, the ideal time to buy comes when shares hit trend line support, then bounce higher. That bounce tells us that support is still in play, a factor that dramatically limits the risk of being a buyer. If the trade does move against you, you’ll know quick enough to get out with minimal damage to your capital.
With Mattel bouncing right now, it makes sense to be a buyer here. Keep a protective stop just under support; if shares fall below that level, the pattern is broken.
I also featured Mattel recently in "7 Hot Stocks on Traders' Radars."
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.