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5 Big Stocks to Trade for Gains - 48182 views
BALTIMORE (Stockpickr) -- The market’s selling off hard today -- no surprise after the flow of underwhelming economic data that’s flooding Wall Street this week. Jobs numbers came in worse than expected, housing numbers slid some more, and the Fed is readily admitting that the economy stinks right now. Those three factors have the S&P 500 index sitting more than 1.3% lower as of this writing.
On Tuesday, I mentioned that major indices are at a key technical level right now and that bearish implications could ensue if stocks fail to hold up above support. Today’s economy-induced selling could certainly test that.
But that doesn’t mean that traders are without viable opportunities as we wrap up June. Where the big names on Wall Street go, the rest of the market seems to follow. That’s why we’re taking a technical look at five more big-name stocks to trade for gains this week.
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In case you’re not familiar with technical analysis, 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 by some measures, 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 big-name stocks.
Let’s start the week with one of the few bullish setups I’m seeing in the large-cap market right now: Qualcomm (QCOM), which I highlighted recently in "5 Stocks for a Market Rebound." Shares of this communications giant have rallied nearly 10% in 2011, making the stock one of the few blue-chips that have managed to avoid being dragged to the ground by broad-based selling. Now, shares could be in for an even more substantial rally.
That’s because Qualcomm is currently forming a bullish ascending triangle setup. Simply put, an ascending triangle is formed by a horizontal resistance level overhead and uptrending support below. As shares get squeezed in between those converging technical levels, the chances for a breakout above resistance increase considerably. Right now, that resistance level to watch is $59.
It’s important to actually wait for shares to hold above that resistance level before buying. That’s because resistance acts as a price ceiling for shares with excessive supply at an overhead price. Until eager buyers absorb that supply of shares, the probabilities of a breakout aren’t in bulls’ favor.
Another upside setup is taking place in shares of Dell (DELL), one of TheStreet Ratings' top-rated computer hardware stocks. As with Qualcomm, Dell is a tech industry name that’s managed some truly material outperformance over the S&P so far this year. But it’s the stock’s current technicals that make it worth watching this week.
Dell is currently forming a rounding bottom, a setup that’s best described as a previous resistance level followed by a pullback that gradually becomes a retest of that original resistance level; ultimately, it looks like a round bottom. While the pattern is easy to spot, it’s the act of breaking above that previously set resistance level that’s technically important.
In Dell, the current rounding bottom (with resistance at R2) is actually coming up after a previously successful rounding bottom triggered in late April (on the break above resistance at R1). Because this stock has recently had success in the same pattern, the chances of success on this second go-around are greatly increased. Wait for shares to hold above R2 before you consider this a buying opportunity.
As of the most recently reported period, Dell is one of the top holdings of Whitney Tilson's T2 Partners.
Last up on the bullish front is health insurer UnitedHealth Group (UNH), one of TheStreet Ratings' top-rated health care provider stocks. The health care sector has shown some noticeable relative strength vs. the broad market since April’s top, and UnitedHealth is one of the best examples of it. This stock has been in an upward trajectory since late December, climbing more than 40% so far this year as prices bounced within a channel up.
A channel up is an important pattern because it provides well-defined boundaries for a stock’s price action. While those boundaries aren’t infallible, they do show traders the high probability outcome for prices to follow. To increase those odds, traders should wait until support or resistance levels get confirmed by a reversal before taking a trade in either direction. In the case of UNH, the uptrending channel means that this is a bullish setup. Wait for a bounce off of trend line support before going long.
UnitedHealth, one of the top holdings of David Tepper's Appaloosa Management, showed up on a list last month of 6 Stocks on Pace to Double This Year.
On the other side of the spectrum is pharmacy company Walgreen (WAG), one of the S&P 500's Dividend Aristocrats. Even though Walgreen has been among the beneficiaries of health care’s relative strength in recent months, this stock is a solid short candidate right now.
That’s because shares had been forming a rising wedge, a bearish pattern that has some striking similarities to the channel up in shares of UnitedHealth Group. Unlike the UNH setup, though, the uptrending support and resistance levels in a rising wedge are converging, an indicator that buyers are losing momentum as the uptrend progresses. This week, shares broke below their support level, triggering selling in this stock.
If you’re looking to take this trade, I’d suggest betting against stares with a protective stop just above the 50-day moving average.
CVS Caremark (CVS) is another pharmacy retailer that’s showing a bearish turn right now -- albeit not quite as bearish as Walgreen's. Like its peer, CVS is breaking down below an important support level today, but the key to this trade is the fact that shares are staying within their price channel.
Short-term, this could be a reasonable short play, but longer-term, I think this stock could find support at S2. If you’re not a short-term trader, sit this one out until shares test that support level.
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.