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BALTIMORE (Stockpickr) -- Just a week or so into trading in 2012, the New Year has already brought bigger stock gains than all of 2011. The question now is whether stocks can continue their trajectory.
Europe’s back in the headlines again, threatening to derail the S&P 500’s auspicious 2.77% start, as the possibility of a recession across the pond weighs on traders. While it was only a matter of time until the eurozone got back on investors’ minds, the surprisingly low volatility of this week is at least preventing a meltdown until more conclusive data comes forward.
In the meantime, correlations between the broad market and its constituent stocks are swinging higher once again. Unlike the last quarter, where those high correlations were a death knell for trading, bullish techincals in the S&P mean that rising tides could lift all ships in the first quarter of 2012. Traders should keep an eye on the S&P 500 for a breakout above the 1290s -- that would provide a good indication that buyers are in control of the market for a change.
Meanwhile, more zoomed-in technical trading opportunities forming in a handful of the biggest stocks.
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 large-cap power management company Eaton (ETN). It’s been a fairly rough year for shares of Eaton. The stock has slid more than 7% in the last year, underperforming the S&P 500 by a fairly wide margin. A new technical setup in shares points to a turn-of-fate for shareholders, however.
For the last couple of months, Eaton has been forming an ascending triangle -- a bullish setup that’s formed by horizontal resistance to the upside and uptrending support support and resistance below. Eaton broke out above that resistance level this week, triggering a buy signal for traders. The lack of another meaningful resistance level nearby means that this stock could have plenty of room to move higher.
Momentum, in the form of 14-day RSI, has been trending higher since August, a factor that adds some extra confirmation to this triangle setup. As long as the uptrend in RSI remains unbroken, traders should feel good about this breakout. I’d recommend keeping a protective stop at the 200-day moving average.
Annaly Capital Management
A similar setup is forming in shares of Annaly Capital Management (NLY) -- except in the case of this mortgage REIT, the breakout has yet to happen. That’s a good thing for investors looking to get ahead of a move in shares.
Like Eaton, Annaly is forming an ascending triangle setup, in this case with resistance at $16.50. The ascending triangle works like this: As shares of Annaly bounce in between that resistance level at $16.50 and uptrending support below, they’re getting squeezed closer and closer to a breakout above resistance. A breakout above that price level indicates that buyers have absorbed the glut of supply that’s previously existed at $16.50.
Because Annaly is a mortgage REIT, it tends to trade in a fairly tight range. While that does constrict the upside prospects of this stock, fairly volatile interest rates and investor demand for income stocks could still help spur a material breakout move in NLY.
Apple (AAPL) had a mixed year in 2011; while shares rallied more than 25% on the year, the firm lost its visionary co-founder, a man whose vision is largely linked to the company’s commercial success. The jury’s still out on whether Apple’s innovation will remain as driven under new leadership, but recent price action suggests that at least share prices will be.
That’s because Apple is currently testing resistance at the $325 range. $325 acted like a strong price ceiling the last two times the firm’s stock approached it (in September and October), as eager sellers took gains and swarmed any bids for Apple stock that those lofty levels. Now, though, shares have an opportunity to push through that barrier this week and make new highs.
A breakout in Apple is significant because it wouldn’t just be the penetration of a tough resistance level -- it’s also a breakout to all-time highs, a scenario that adds a psychological edge to buyers. The fact that the firm’s RSI downtend broke late last month provides some confirmation of upside bias. Still, I’d suggest waiting for the breakout to happen before taking a position at these prices.
Like most other financial firms, Citigroup (C) has been under a lot of pressure in the last year. Increasing risks in the financial system (measured by a rising TED spread) have hiked investor uncertainty in the big banks, and sent share prices dramatically lower in the process.
But like other names on this week’s list, Citi is benefitting from high correlations with the S&P.
Like Eaton and Annaly, Citi is forming an ascending triangle right now off of its fourth quarter lows. That triangle broke out in yesterday’s session, sending a buy signal for traders watching this stock.
While upside resistance at $34 does put a near-term price barrier on shares, traders looking for a short-term trade would do well to pay attention to this $91 billion bank. Keep a protective stop at the 50-day moving average.
Citigroup is rated C- hold by TheStreet Ratings and shows up on a recent list of the Top Bank Stocks for 2012 From Credit Suisse. For another technical take on Citi, check out yesterday's "5 Stocks Poised to Break Out."
Last up this week is another bank stock, BanColombia (CIB). This $12 billion firm is one of the largest financial institutions in South America -- and its foreign exposure means that it’s one of the few that doesn’t sport a massive correlation with the broad market right now.
BanColombia is currently locked in a downtrending channel, a sort of dynamic resistance and support range that’s restricted shares’ movements since the start of the summer. This bearish setup in CIB is providing a potential shorting opportunity for traders who are willing to bet that the trend will continue. For investors with excessive long-side exposure, this longer-term trade adds some strategy diversification.
In a downtrending channel, the optimal entry point comes when shares of CIB bounce off of the resistance level that acts like a price ceiling for shares. Then, it makes sense to put a price target down at the bottom of the channel. You can increase the probability of the trade by narrowing the support and resistance levels (and decreasing the sensitivity of your trade signals).
If you do decide to take this trade, keep a close stop above that trend line resistance level.
BanColombia is one of TheStreet Ratings' top-rated diversified bank stocks, with a B- buy rating.
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.