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BALTIMORE (Stockpickr) – With this morning’s opening bell, investors are entering the final stretch of 2012. There are only two months left to the calendar year (or for some, just a month and change until the end of the world), which means that institutional money is at battle stations, trying to close the gaps between their performance and their benchmarks.
With the S&P 500 up more than 12% in 2012, and many investors out of the market at key inflection points this year, that gap is going to be a tough one to fill.
That said, this gap could help spur some serious money moving out of treasuries and into equities once again. I’ve said before that stock investors are in a waiting game. Once people invested in treasuries can’t stomach earning less than inflation, the flow of funds from treasuries to stocks is going to move prices higher for Mr. Market (and yields too, for that matter).
In the meantime, there are still trades to be made in stocks. That’s why we’re taking a technical look at five big names that are tradable 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, I take an in-depth look at big names that are telling important technical stories. Here's this week's look at the charts of five high-volume stocks to trade for gains.
Internet search giant Google (GOOG) has had better months. Shares of the firm are down considerably from a couple of weeks ago when the firm’s poor earnings were accidentally released to Wall Street. The flub exacerbated investors’ poor reaction to the numbers, and shares have traded lower ever since. So, what to do with Google now?
For starters, the earnings drop was bad, but Google had already broken its uptrend four trading sessions earlier. That lack of a support level acted like cement shoes when Google eventually posted its numbers; there was no one there to “catch” its price with a bid. Since the selloff, shares have been consolidating sideways in an extremely tight range. Consolidations give investors a chance to catch their breath as a stock bleeds off its extreme momentum. That’s exactly what’s going on in Google this week.
And there’s a trade to be made in this setup. If the consolidation indicates that investors are still making their minds up about Google, then we want to be buyers after they’ve made up their minds. The buy comes if Google breaks out above the top of the rectangle in the chart – if it falls through the bottom, then (GOOG) has more downside likely.
We’re seeing a very similar setup in shares of retail behemoth Amazon.com (AMZN)
right now. Like Google, Amazon had trending up until the first week of October, then started trading lower. The fact that these two charts look alike isn’t a big surprise – they’re both mega-cap tech stocks, so correlations between the two are very high. That’s what makes Amazon’s more recent price action so interesting.
Unlike Google, Amazon hasn’t been consolidating lately -- instead, shares made a move called a “v-bottom.” Basically, a v-bottom is a reversal pattern where a stock moves from a downtrend to an uptrend almost instantaneously. That snap higher means that sentiment switched hard from bearish to bullish (with earnings as the catalyst here), and that shares are bound for higher ground. The huge volume that shares saw on their first white bar day on Friday was a good sign that buyers were jumping aboard Amazon en masse.
Momentum is the one indicator that’s still diverging from Amazon’s bullish picture right now. Fourteen-day RSI remains in a downtrend (albeit just barely), signaling that shares are still moving lower at an increasing rate despite the sentiment switchover. For investors looking to go long, I’d recommend waiting for the RSI downtrend to break and for price to move above Friday’s highs before putting money on the line.
Fastenal (FAST) is staging a reversal of its own right now – just in the much longer-term. The $13 billion fastener and industrial supply firm has spent much of the last year forming an inverse head-and-shoulders pattern that doesn’t want to end. Even though this pattern isn’t exactly textbook, the trading implications are the same as if it were.
In short, the inverse head-and-shoulders pattern indicates exhaustion among sellers, formed by two swing lows (the shoulders) that are separated by a lower low (the head). The sell signal comes on a move through the neckline level, around $45 in Fastenal’s case. What makes the setup unique for is that the right shoulder has continued to drag on for the last two months. Even though that’s not exactly the norm, that the setup has still obeyed resistance at the neckline means a neckline break is still a valid buy signal.
Don’t let the popularity of the inverse head and shoulders fool you. This may be one of the first price setups would-be traders discover, but it’s also one of the most powerful: a recent academic study conducted by the Federal Reserve Board of New York found that the results of 10,000 computer-simulated head-and-shoulders trades resulted in “profits [that] would have been both statistically and economically significant.” Wait for $45 to get broken before buying.
2012 has been a rough year for shareholders of U.S. Steel (FAST) – shares of the $3 billion steel company have slid more than 22% since the first trading day in January. But even though this stock has been underperforming the broad market, there’s upside potential brewing in shares.
Right now, U.S. Steel is forming an ascending triangle bottom. The pattern is formed by horizontal resistance at $23 and uptrending support below shares. As the stock bounces in between those two price levels, it’s getting squeezed closer and closer to a breakout above that $23 resistance level. When it happens, traders have a buy signal.
In real terms, the resistance level at $23 is a price above which there’s a glut of sellers. That’s why it’s acted like a price ceiling the last four times U.S. Steel’s price approached it – sellers have been more eager to sell and take some semblance of gains than buyers were to step in and buy. A move above $23 means that those sellers’ supply of shares has been absorbed by increasingly eager buyers, making upside in U.S. Steel a high-probability trade.
Uptrending RSI adds some confirmation to the upside in this setup.
Last up today is mid-cap heating and cooling appliance maker Lennox International (LII). One look at Lennox’s chart, and it’s pretty clear what’s going on in this stock, even if you’re not a technical analysis expert. Shares of Lennox have been trading in an uptrending channel for the better part of 2012, giving traders well defined buy and sell targets all the way up.
Right now, the stock is sitting up near resistance, which makes another move lower look likely. After that, investors should be looking for an opportunity to buy on the bounce off of trendline support. With it in an uptrend, why wait? The best time to buy a stock that’s in an uptrending channel comes at support – it’s the place where shares have the furthest to move back up to resistance (the top of the channel) and where they have the least distance to move through support.
Since a breakdown below support means that the channel is broken, support is also a logical place to put a protective stop below to ensure minimal risk. Patience is a virtue with this setup.
To see this week’s trades in action, check out the Technical Setups for the Week portfolio on Stockpickr.
-- Written by Jonas Elmerraji in Baltimore.
At the time of publication, author had no positions in stocks mentioned.
Jonas Elmerraji, CMT, is a senior market analyst at Agora Financial in Baltimore and a contributor to TheStreet. Before that, he managed a portfolio of stocks for an investment advisory returned 15% in 2008. He has been featured in Forbes , Investor's Business Daily, and on CNBC.com. Jonas holds a degree in financial economics from UMBC and the Chartered Market Technician designation.