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5 Big Stocks to Trade for March Gains - views
BALTIMORE (Stockpickr) -- Even though February trading ended on a sour note yesterday, what a month it was for Mr. Market.
All told, February 2012 closed the books with 4.1% gains in the S&P 500, making last month the best February investors had seen in the last 14 years. Yesterday’s turn lower came after Fed Chairman Ben Bernanke’s testimony to the House Financial Services Committee yesterday ignored the possibility for another round of quantitative easing.
Hardest hit was gold, which fell 5% in yesterday’s session, after futures tried to test the $1,800 level this week. Clearly, gold bugs had been pricing in the possibility of QE3 for a while now.
Even so, the signs still look auspicious for stock investors. Yesterday aside, S&P has rallied more than 8.6% so far in 2012, and corporate earnings remain at all-time highs. At the same time, key economic numbers like unemployment and consumer confidence have made strides toward recovery in the past few months. That doesn’t mean that now’s the time to start buying with both hands -- but it does mean that traders can find some big opportunities to squeeze gains out of the market in March.
To do that, we’re turning to the technicals in five of Wall Street’s big-name stocks this week.
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.
So far, this year’s been par for the course for shareholders of $123 billion mining stock BHP Billiton (BHP). Shares have climbed around 8.8% so far this year, strong performance that essentially mirrors the gains we’re seeing in the broad market.
But BHP could be on the verge of a bigger move in March. Here’s why.
Right now, BHP is forming an ascending triangle setup with resistance at $83. An ascending triangle is a bullish price pattern that can be spotted by a horizontal resistance level acting as a “price ceiling” for shares, with uptrending support below; a breakout above that $83 resistance level sends a strong buy signal for shares of BHP.
Typically, the ascending triangle pattern is a continuation pattern (that is, it occurs in the process of an uptrend). In this case, though, BHP is forming an ascending triangle at the bottom of a downtrend. Despite the different positioning, the trading implications are exactly the same for this setup.
Adding to our confidence in this setup is the fact that momentum, as measured by 14-day RSI, has been locked in a solid uptrend since August. Since momentum is a leading indicator of price, that’s added assurance that we’ll see that test of $83. Until it happens, there isn’t a high-probability trade in BHP.
One big bet on BHP Billiton comes from Ken Fisher's Fisher Investments, which held 6.1 million shares of the stock as of the most recently reported quarter.
A similar setup is forming in Unilever (UL) right now. Like BHP, Unilever is forming an ascending triangle, in this case with resistance at $33.50.
Unlike BHP, the setup in Unilever is effectively a picture-perfect, textbook example of an ascending triangle. That’s because the triangle is forming after an uptrend has been established (making it a continuation pattern), momentum is locked in an uptrend, and volume is dropping right now.
That last element may sound like a bizarre thing to look for in a bullish setup. After all, isn’t rising volume a good thing for an uptrend? Normally, the answer is yes, but not in an ascending triangle setup. Instead, a gradual decline in volume, followed by a volume spike on a breakout above $33.50 is a positive sign for longs. That spike on the breakout indicates that there’s participation in the trade now that buyers have absorbed excess supply above $33.50.
Another interesting thing you may notice about UL’s chart is the fact that it seems to be filled with gaps. Normally, extremely gappy trading is a bit of a concern – it suggests that a stock is volatile. But in UL’s case, those gaps are suspension gaps caused by off-hours trading on the London and Amsterdam exchanges; they’re not significant for trading purposes.
China Mobile (CHL) is a large-cap Chinese stock that I last talked about a week or so ago in "5 Chinese Stock Trades With Breakout Potential," when looking for technical setups in Chinese firms that trade here at home. I think that this trade bears revisiting today.
China Mobile completed a double-bottom setup back in late December after posting two swing lows at the S3 level on the chart above. From there, shares pushed through two important resistance levels, making their way to the breakout level we were watching last week at $52. A throwback this week provided an opportunity for traders to retest newfound support at that $52 level -- and provided a second chance at a low-risk entry point for longs.
Now CHL is back in breakout mode. With shares still just a few points off of that $52 price, there’s still time to take a position in CHL. If you do, I’d recommend keeping a protective stop just below that $52 price.
China Mobile’s setup is also important because it tips off traders to a similar setup in Goldman Sachs (GS). Goldman hasn’t exactly been a stellar performer in the last year -- shares of the investment bank have fallen more than 30% in the last 12 months, dragged lower as the whole financial sector took its knocks in 2011. But a double-bottom in GS could spell significant upside in this fallen financial.
Goldman formed its double-bottom at the start of the new year, when shares found support a second time at $90. The second bottom is actually a shorter-term double bottom itself, with a breakout level at B2. Because the intermediate peak at B2 failed to reach the firm’s current breakout level, it’s not a triple-bottom; either way, though, the trading implications are exactly the same. The buy signal comes on a push above resistance at that $118 price level.
When that happens, I’d recommend putting a protective stop at the 200-day moving average.
Last up is Ventas (VTR), a $16 billion senior housing and healthcare REIT that’s been stuck in an uptrending channel since the August low in the broad market. Basically, the channel puts Ventas in a range between a dynamic support level to the downside, and a dynamic resistance level to the upside. In real world terms, that means that we’ve got a very good picture of Ventas’ high-probability moves right now.
An uptrending channel is a bullish pattern, but the ideal entry point for this setup comes when shares bounce off of trend line support. That’s because that price gives us the greatest vertical height as shares make their next attempt at traversing the channel. Buying on a bounce of trend line support also reduces traders’ risks in VTR for two reasons: It reaffirms that VTR is able to catch a bid at support (so it acts like a price floor), and it means that if VTR does fall through support, shares don’t have far to go before we know we’re wrong and get stopped out.
Waiting for that bounce is crucial – support levels do invariably fail in the long-term. We want to make sure that trendline support in VTR is still solid before buying.
VTR shows up on a list of the Best Growth Stocks for 2012.
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.