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BALTIMORE (Stockpickr) -- Earnings plus Thursday’s regular dump of economic data are putting the onus on the fundamentals today, as investors wait to see whether companies hit their numbers -- and whether everything from this morning’s jobs data to this afternoon’s Fed update hits the mark. A big earnings beat from high-profile General Motors (GM) should help buoy stocks more than most this morning.
Like I said on Monday, “sell in May and go away” isn’t looking like a good plan for investors this time around.
After much anxiety, investors are also starting to realize that the correction in the S&P 500 was just that: a pullback following one of the biggest rallies since 2009. With the broad market back above 1400 this week, buyers should start getting comfortable again. The S&P’s high water mark this year at 1422 is still an important resistance level -- it’s the nearest overhead level where sellers became handily more eager to sell and take gains than buyers were to buy. A push above 1422 indicates to traders that the pocket of excess supply of stocks at that level has been completely absorbed by buying.
To take advantage of increased investor confidence, let’s take a technical look at how some of 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 China Mobile (CHL), the world’s biggest mobile phone carrier. China Mobile has been having a strong year in 2012, rallying more than 15% year-to-date on the heels of strong fundamental performance. But the gravy train may not be over yet for CHL shareholders thanks to a bullish technical pattern forming in shares.
CHL is currently forming an ascending triangle pattern, a setup that’s marked by a horizontal resistance level to the upside, and uptrending support below shares. As shares of CHL bounce in between those two lines, they’re getting squeezed closer and closer to a breakout above that resistance level (in this case at $56 and change). A breakout above that resistance line is a buy signal for traders; it indicates that the glut of supply of shares that’s caused prices to retreat in the past has been absorbed.
CHL is a nearly textbook example of an ascending triangle -- not only does it have the requisite combination of horizontal resistance and uptrending support, it also has had declining volume as the pattern progressed. We’ll want to see a volume spike when shares break out above resistance.
With CHL bumping against resistance this week, traders should be keeping a close eye on this stock today.
Beer giant Ambev (ABV) is another stock that’s forming an ascending triangle setup right now. The company, which weighs in as the biggest beer brewer in Latin America, has had an impressive rally of its own in 2012: shares have climbed around 16% since the first trading day in January. For ABV, the resistance level to watch is $44.
Like with CHL, Ambev has some other factors that add to the strength of this pattern. The first is volume; trading has been slowly declining since the pattern initiated in late March. The second is momentum, as measured by 14-day RSI; momentum has been in a steady uptrend since late November 2011 -- the fact that the RSI line is as of yet unbroken tells us that prices are still climbing at an increasing rate, a good sign for a bullish breakout.
Since the start of the year, the 50-day moving average has been acting as a good proxy for support; for that reason, I’d recommend putting a protective stop just under that price if you decide to take this trade.
I know that in last week’s column I said to forget Apple (AAPL), but a new setup in shares is bringing our attention back to the world’s biggest company this week. Apple has been absolutely on fire in 2012, rallying more than 44% so far this year after producing similarly massive returns in 2011. Now the question on everyone’s mind is whether this momentum stock can keep it going.
A different sort of triangle could give us the answer.
Apple is forming a symmetrical triangle right now, a pattern that’s formed by a combination uptrending support and downtrending resistance converging. While the symmetrical triangle isn’t as staunchly bullish as an ascending triangle, it’s more often than not a continuation pattern. With Apple up so much this year, continuation would be a very bullish sign indeed. The direction that Apple breaks outside of the triangle will ultimately signal the direction of this trade.
It’s worth noting that Apple’s uptrend has accelerated three times since December (a fourth acceleration between February and April broke). The fact that we’ve still got three uptrend lines intact as support of AAPL bodes well for shareholders from a risk management standpoint. Shorter-term traders should look to get out on a break below the triangle.
SPDR Gold Trust
Gold has lost some of its glimmer in the last few months, as a pullback from all-time highs made goldbugs question how much higher their favorite metal could go. But a bullish setup in the SPDR Gold Trust (GLD) could mean significant upside for gold prices in the next few months. Here’s how.
GLD is currently forming an inverse head and shoulders pattern, a setup that indicates exhaustion among sellers. The buy signal comes when GLD breaks out above the pattern’s neckline, currently right around $172.50. Bear in mind that this is a very long-term pattern (it’s been forming since September) – so it’s crucial not to be early on this trade. While waiting means giving up some potential gains on this trade, it also means avoiding the vast majority of risk.
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 gold prices in 2012.
Last up this week is Xcel Energy (XEL), a $13 billion utility stock that’s showing traders a bullish pattern of its own this week. XEL is forming a rounding bottom (also sometimes called a saucer pattern), a setup that indicates a gradual shift in control from sellers to buyers. As the name implies, rounding bottoms typically happen when a stock bottoms after a downtrend, but they can also occur after a rally. Don’t get harangued by the terminology -- instead, focus on XEL’s breakout level.
The time to buy comes when XEL pushes above resistance at $27.50, the price where this stock’s uptrend got reversed and the saucer started forming.
In the near-term, XEL has hit some resistance at $27. That means that it’s likely XEL will make the move from $27 to $27.50 rather quickly. With shares testing $27 this week, it’s going to be important to keep a close eye on this name from this point on. The $26 mark is a good place to put a protective stop once this trade triggers.
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.