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5 Big Stocks to Trade for Gains - 31195 views
BALTIMORE (Stockpickr) -- What a way to start the month. Yesterday, the S&P 500 posted a 2.3% decline by the 4 p.m. closing bell, the biggest single-day loss in 2011. In fact, we haven’t seen a slide quite that large since back in August 2010. Weakness wasn’t relegated to U.S. markets during June’s first trading day -- stocks suffered globally as major market concerns such as QE2, Greek default and shaky economic data prompted investors to yank cash out of stocks.
Wednesday’s slide brings the S&P 500 to within a stone’s throw of major support at 1,300. That’s a level that most investors would rather not test under our current market conditions.
But while stocks are shedding gains, trading conditions have frankly been improving. A slew of recent breakouts suggest that the ranging market of the past month is finally turning directional. With an abundance of interesting setups taking place in Wall Street’s biggest names right now, it’s time to turn to the technicals to find big stocks worth trading.
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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 high-volume stocks.
Las Vegas Sands
Casino stocks have been on investors’ radar this quarter, fueled largely by solid earnings season results. Just a couple of weeks ago, we took advantage of a double-bottom setup in MGM Resorts (MGM) for a chance at 7% upside in a week. Now a similarly bullish setup is starting to show itself in Las Vegas Sands (LVS).
In LVS, the formation worth watching is an inverse head and shoulders, a bullish setup that marks exhaustion on the part of sellers. Essentially, an inverse head and shoulders is marked by two intermediate troughs (shoulders) with a deeper trough (head) in between them. Like the vast majority of technical trades, this one is contingent on a break above the neckline, the pattern’s upside resistance level.
Don’t be thrown off by the downtrend to the neckline in LVS right now -- that bearish skew actually increases the likelihood of seller exhaustion in shares. Once shares do manage to hold above the neckline, it makes sense to go long. Consider a protective stop right below the 200-day moving average when that happens.
Entertainment giant Disney (DIS), one of TheStreet Ratings' top-rated media stocks, has been seeing a mixed year in 2011. While shares are up more than the broad market on the year, most of that trading has taken place in a horizontal consolidation channel, price action that’s presenting us with a solid “if/then trade” right now.
An if/then trade is a contingent trade that doesn’t have directional bias -- in other words, the ultimate direction of the trade is determined by the direction that Disney breaks out of its channel in. With well-defined support below and resistance above, there are large pockets of supply and demand for Disney’s shares; traders will want to see one of those imbalances absorbed by the opposing side before taking a trade on shares of Disney. That factor makes it a high-probability trade.
So, why the name “if/then trade”? It’s because of how the trade works. If shares of Disney break above resistance, then it’s time to buy shares. If they slide below support, then it’s time to short. There’s no trade until those conditions are met.
Showing a slightly modified version of that if/then setup is tech behemoth Apple (AAPL<), which managed to largely hold its ground yesterday in spite of the colossal selling pressures taking place at the broad market level.
The key difference in Apple is the upside resistance level. It had previously been trending lower (a sign of short-side directional bias among market participants), but broke above its trend line in yesterday’s trading session.
If shares can sustain their position above that trend line in today’s market, the trend line break should be a good opportunity to pick up shares of Apple on the cheap. The previous high of $364.90 offers a solid upside target for shares. If you want to take this trade, consider a protective stop just below the 50-day moving average.
Apple shows up on a recent list of 12 Stocks on Goldman's Sell Block.
Research In Motion
One stock that wasn’t able to hold up amid yesterday’s market selling was Research In Motion (RIMM), the $21 billion maker of the BlackBerry. Shares of RIMM have gotten shellacked in 2011, sliding more than 30% year-to-date. Yesterday, they caught the downside concerns from Nokia’s (NOK) poor guidance and increased competition from Apple, falling nearly 6% on the day.
The question on most investors’ minds now is whether shares have further to fall.
The answer is a resounding “yes.” That’s because yesterday’s trading shoved shares below their previous support level. Now, with little in the way of defined demand for shares to the downside, shares of RIMM will need to find a bottom before it makes sense to pick up shares of this mobile device maker.
A nearly opposite situation is taking place in shares of Netflix (NFLX), the mail-order DVD rental service that’s made major industry waves in recent years with its internet video streaming offerings. Shares of Netflix had been forming a bullish ascending triangle setup for the last few months, but a breakout last week has put this stock in breakout mode right now.
That, coupled with the size of the setup, suggests that gains could have further to run in June. This breakout is still in the nascent stages.
To see this week’s potential 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.