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BALTIMORE (Stockpickr) -- Earnings season is back -- and it couldn’t have come any sooner.
Individual stocks have been driven by global macro factors lately. Jobs numbers, Fed policy and the European debt debacle have been the news items behind market participants’ sentiment. For investors, that’s not a good thing; ultimately, earnings are a much more direct indicator of an investment’s worth than macro factors could ever hope to be.
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The increased emphasis on corporate earnings could do quite a bit to change the tone of the market right now by shoving away the cloud of uncertainty hanging over Wall Street. Given the rally that stocks have seen in the last week and change, investors may not be too eager to shake things up -- but that’s a mistake.
From a technical standpoint, this rally has been anemic. It’s lacked volume confirmation (which indicates participation is waning as stocks climb), and more significantly, it’s failed to cause breakouts in either indices such as the S&P 500 or a meaningful chunk their constituent stocks.
That inability to push values past resistance tells us that, so far, most of this rally has been made up of “easy moves.” Market breadth needs to strengthen if this positive push is going to continue.
In the meantime, there are trades to be made in October. Now, with fundamental news hitting the street in the form of earnings, technical trades are starting to spring up in some of Wall Street’s biggest names.
In case 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, technicals are 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.
Amazon.com (AMZN) has been making big moves recently, taking on the likes of Netflix (NFLX) with its expanded streaming video service and vying for a chunk of Apple’s (AAPL) iPad share with its new Kindle Fire tablet. It’s an aggressive approach to growth, but investors seem to be liking it; shares of Amazon have shown considerable relative strength this year, and they could be headed higher.
That’s because Amazon is currently testing resistance at its 52-week high, a price level that shares weren’t able to surpass back in early September. Essentially, resistance levels such as the $242 high in Amazon occur when a pocket of supply overwhelms the demand that’s been propelling shares higher. That pocket of supply (often a place where sellers think shares look “expensive,” and they’d better liquidate) is the reason why a single resistance level can act like a sort of price ceiling for shares over and over again.
A breakout above $242 indicates that whatever supply existed at that level has been absorbed by increasingly eager buyers and that that upside barrier no longer exists. Better still, that breakout would mean new highs in Amazon’s case, a bullish signal in and of itself -- after all, shareholders are less likely to be anxious about getting out when everyone who bought in the last year is sitting on gains.
I’d recommend going long on a breakout above that horizontal resistance level. Traders should watch out for a potential stumbling point at Amazon’s longstanding trend line resistance level in the chart above.
A similar setup is taking shape in shares of automaker General Motors (GM). The biggest difference in this setup is the fact that GM isn’t facing a potential breakout to new highs. Shares have gotten shellacked alongside the rest of the market, crashing more than 36% year-to-date. A breakout above $24 could pare down some of those losses.
That $24 level is a price that previously acted as a support level for shares back at the start of August. The breakdown below it signaled a short trade in shares -- but more recently, the rising tide of the broad market has been lifting all ships, GM among them. Right now, two overhead resistance levels provide reasonable upside targets in a GM trade; I’d recommend progressively scaling out your position if shares can traverse those levels.
Keep in mind that a sustained breakout above $24 is needed for this to be a high-probability trade. Until it happens, we can assume that there’s still considerable resistance at that price level. When the GM trade triggers, a protective stop at $22 minimizes the risk in this setup.
GM shows up on a recent list of 6 Auto Stocks That Could Accelerate.
Verizon (VZ) is another name that’s got breakout potential right now -- it’s just showing it in a more disciplined fashion. This telecom giant is forming an ascending triangle right now, a bullish formation that becomes buyable on a push above $37.
There are two factors that are key to spotting an ascending triangle: horizontal resistance (in VZ’s case at $37) and uptrending support. That trend in support indicates bias toward buyers; as that lower support level squeezes shares against the horizontal resistance level above, the potential for a breakout increases dramatically. In a more “textbook” ascending triangle, I’d normally like to see more tests of that resistance level before a breakout occurs == but the recent weakness in the whole S&P 500 gives VZ’s setup a pass.
The 14-day RSI, a measure of momentum, is showing bullish confirmation of a move higher. That’s particularly important because momentum is a leading indicator of price. After a breakout in VZ, the most logical place for a protective stop comes just below that support level.
Dutch banking giant ING Groep (ING) has struggled to hold its ground in the last few months, pressured lower by exposure to Europe’s debt crisis and overall underperformance in the financial sector. Now, with a bullish technical setup that’s a bit further along, this stock may have turned the corner.
ING is currently forming a bullish inverse head-and-shoulders setup, a bullish setup that’s the mirror image of the well-known “head-and-shoulders top.” The breakout signal came yesterday, when ING broke through its neckline. While this is a fairly compact setup, there’s still upside to be had right now.
Because this name has already broken out, entry strategy is to take a starter position here, then look to build a bigger position if shares throw back to retest the neckline. In that scenario, you’ll only want to buy on a bounce higher from the neckline -- not merely the first touch of that price level.
One of the first things you may have noticed about this chart is the abundance of gaps. Those gaps -- called suspension gaps -- are the result of the fact that this stock is dual-listed on an exchange that trades when U.S. markets are closed. Don’t sweat the suspension gaps. From a technical standpoint, they can be ignored.
Last week, Dupont was struggling. The conspicuous head-and-shoulders in shares had already slingshotted shares to a 52-week low, and the stock was dramatically underperforming the broad market. But the head-and-shoulders had already run its course, falling straight to its price objective (the dashed line), only to provide a bullish Japanese candlestick formation known as an engulfing candle.
While Japanese candlesticks are very short-term indicators, they can be particularly effective reversal signals when stocks are at price extremes. Sure enough, shares have moved straight up to our $44 price target, generating 7% gains in the last week. If you took this short-term trade, I’d suggest taking gains at this point.
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.