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BALTIMORE (Stockpickr) -- The markets continue to be driven by governmental missteps this week, as Italian debt worries, U.S. debt worries and now the potential for increased Fed stimulus all get priced into stocks.
Now traders are left wondering which of those news items will win the tug of war.
News that the Fed could pump up stocks with another round of quantitative easing -- in other words, QE3 -- reversed the market’s downward trajectory at the start of yesterday’s trading session. But even through Wall Street is reacting well to speculation that Chairman Bernanke could whip out the Fed’s wallet again, the move may not be necessary as far as stocks are concerned.
From a technical standpoint, the S&P 500 has been showing important signs of strength in the last couple of weeks. As a result, we’re getting some impressive trading setups in shares of some of Wall Street’s biggest stocks right now.
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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 must-see stocks.
Netflix (NFLX) has been getting a lot of attention this week following its decision to significantly hike rates for its services. Over the last few months, I’ve head plenty of arguments about why Netflix’s overpriced shares should be avoided. But you just can’t fight the tape on this stock -- the technicals show strong momentum in Netflix right now.
Last week, Netflix staged a meaningful breakout above $280 resistance. Now shares are testing a strong psychological barrier at $300 per share. Because the recent breakout has been more about consolidation than upward trajectory in the last week or two, it looks like there’s still further for this media giant to run. I’d suggest buying a push above $300.
The last time we looked at Netflix in this column, shares were pretty much doing the same thing they are now: breaking out above a previous resistance level. If you want to take advantage of the breakout in Netflix, I’d suggest a protective stop just below $280.
Netflix, one of TheStreet Ratings' top-rated Internet catalog and retail stocks, is one of the 10 Best-Performing S&P 500 Stocks of 2011 and was highlighted last month in "Stocks to Consider for the end of QE2."
IBM (IBM) is another stock that’s seen a recent technical breakout in shares. The company’s thrust higher at the beginning of the month put shares in bull mode -- but a throwback is providing a low risk opportunity for late-comers to build a position in this stock.
A throwback occurs after a breakout, when shares slip back to retest newfound support at that breakout level. Throwbacks serve two purposes: They can confirm the strength of a setup, and they provide a second chance for traders to pick up shares. But be warned: With throwbacks, the art is in the entry. It’s crucial to wait for support to be confirmed before going long shares. That means waiting for a bounce higher off of that price level.
In the case of IBM, the support level we’re watching is $172.50. It looks like shares could confirm a bounce today (we’ll want to see a white bar following the test of support). Consider going long on signs of intraday strength with a protective stop at around $172.
There’s a similar setup in shares of Deere (DE) right now -- one that’s a holdover from last week’s list of Must-See Charts. The swing-trading setup in shares of this agricultural and construction equipment giant is just too solid to leave off the table this week.
More significant, the rounding bottom setup in shares of Deere is fairly similar to what we’re seeing in the broad market right now. While shares tested their resistance range between $87 and $88 last week, they never broke out above it. Instead, prices fell down to a previously set near-term support level before reversing higher. We could well see another shot at surpassing resistance in the next week.
When it happens, the action to take remains exactly the same as it was last week -- if shares open for trading materially above resistance, it makes sense to go long. I’m still suggesting a protective stop just below the 200-day moving average.
2011 hasn’t been a particularly strong year for $225 billion technology firm Microsoft (MSFT), but that could soon be about to change. That’s thanks to a string of rallies that have significantly changed market sentiment for shares of the Windows maker.
It started back in June with an inverse head and shoulders that triggered at the end of the month, sending shares up to their 200-day moving average. From there, shares have been consolidating just below $27, another technically significant resistance level for this stock. With shares moving sideways right now, a move above $27 is the clear trigger to go long Microsoft.
Beyond that price, upside resistance levels are fairly limited -- that means MSFT could potentially re-test 2011’s highs later this year.
Microsoft, one of the top-yielding computer software and services stocks, shows up on recent lists of 5 Tech Titans Teetering at the Brink and Stocks Set to Rebound in Second Half of 2011.
Last up this week is London-based publisher Pearson (PSO), a stock that’s showing traders a solid “if/then” trading setup this week.
Basically, an if/then trade is a setup whose direction is contingent on Pearson’s price action in the near-term. With shares trading in a horizontal channel, a break outside of the channel gives us an indication that it’s time to make a directional bet on shares. If Pearson breaks above $19.50, then it’s time to buy. Otherwise, if shares slide below $18, Pearson becomes a short candidate.
Either way this trade pans out, I’d strongly suggest a protective stop just inside the channel.
Pearson is one of the highest-yielding media stocks.
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.