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5 Big Trades to Take Now - views
BALTIMORE (Stockpickr) -- The government shut down happened. Yesterday's jobs numbers from ADP were garbage. And if members of Congress can't figure out a way to deal with their "frenemies" across the aisle, we'll be staring down the possibility of a historic default on the national debt.
Yeah, it's a scary time to be a stock investor right now. But then again, when isn't it?
Ignore all of those headlines for a minute, and "now" isn't quite so different from "then." The fact remains that there are still some big tailwinds pushing this market along. And there are some tradable setups popping up in some of the biggest names on Wall Street right now.
We're taking a closer technical look at five of them today.
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 five high-volume stocks to trade this week.
SPDR S&P 500 ETF
First up, a look at the big picture in stocks through the SPDR S&P 500 ETF (SPY). SPY is the most investible proxy for the S&P -- and the fund has accumulated more than $150 billion in assets as a result. A quick glance at this chart is all you need to see that there's room left in this rally.
Stocks have spent all of 2013 in a very well defined uptrend. And while that uptrend has been tested more than a few times on the way up, it hasn't been violated. So while the latest correction in the broad market has dropped SPY down near support, it looks a whole lot more like a buying opportunity than a reason to run from stocks. Support has been a whole lot more solid than resistance over the course of this rally; that suggests that SPY can still catch a bid.
That said, I think it's probably a little too early to take a hard buying stand on SPY. Those tests of support in the last year have been really tough tests -- most have even violated the trendline intraday. This correction can move a little lower before bulls need to start sweating. Then I'd recommending buying on the bounce off of support.
It shouldn't be a huge surprise that General Electric (GE) has been in an uptrend of its own. After all, the $247 billion conglomerate correlated very highly with the S&P. And even though GE isn't a screaming buy right now, it's got the best uptrend in the mega-cap space by far.
Like SPY, the best way to buy GE is by waiting for a bounce off of trendline support. Buying off a support bounce makes sense for two big reasons: it's the spot where shares have the furthest to move up before they hit resistance, and it's the spot where the risk is the least (because shares have the least room to move lower before you know you're wrong).
So while GE isn't testing its trendline right now, it is testing a less critical support level at the 50-day moving average. That level has been a good place to buy in the past (the grey arrows on the chart), so investors looking for a place to start accumulating GE would do a lot worse than right here.
If you're a shorter-term trader, keep a protective stop just above the 200-day moving average.
Even though Apple's (AAPL) chart is a little more complicated than the ones of GE and SPY, the trading implications aren't: Now looks like a good time to be a buyer of the world's biggest tech company, believe it or not. Even though Apple can't get much love from investors, I'll go ahead and channel the great technician Walter Deemer by saying, "When the right time comes to buy, you won't want to."
In the short-term, Apple is forming an inverse head and shoulders pattern, a price setup that indicates exhaustion among sellers. After the plunge shares have taken in the last year, sellers at least have reason to be exhausted. The inverse head and shoulders is formed by two swing lows that bottom out around the same level (shoulders) that are separated by a lower low (the head). The buy signal comes on a move through the neckline, which is currently right around $495.
Momentum, measured by the 14-day RSI line, adds some extra confidence to the Apple trade -- it broke its own downtrend back in the middle of September. Since momentum is a leading indicator of price, it boosts that probability of a corresponding breakout in AAPL shares.
Of course, not all of the names we're looking at today are bullish. Exxon Mobil (XOM) is looking bearish in the long-to-intermediate term thanks to a head and shoulders top that's been forming in shares since the start of the summer.
XOM's price pattern is the bearish opposite of the inverse head and shoulders that points to upside in Apple. Like AAPL, the neckline in XOM is sloped, but it's close enough to $85 right now to justify unloading shares (or shorting) if XOM still can't catch a bid down there. Yes, this stock has gotten shellacked in the last couple of months, but it could be due for even lower levels in the fourth quarter.
Lest you think that the head and shoulders is too well known to be worth trading, the research suggests otherwise: 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." That's good reason to keep an eye on both Apple and Exxon in the days ahead.
Banking behemoth Wells Fargo (WFC) is another name that looks "toppy" right now. Make no mistake, WFC has turned out some stellar performance since the calendar flipped over to January, climbing 20% on the year. But traders should be concerned about giving those gains back in the final stretch of the year.
Wells Fargo is currently forming a double-top pattern. Like the name suggests, the setup is formed by two swing highs that lose steam at approximately the same level. The sell signal comes on a move through support at $41, a price that WFC is perilously close to as I write.
Whenever you're looking at any technical price pattern, it's critical to think in terms of those buyers and sellers. Double tops, triangles, and other pattern names are a good quick way to explain what's going on in a stock, but they're not the reason it's tradable. Instead, it all comes down to supply and demand for shares.
That support level at $41 is a price where there has been an excess of demand of shares; in other words, it's a place where buyers are more eager to step in and buy shares at a lower price than sellers were to sell. That's what makes a breakdown below $41 so significant the move would indicate that sellers are finally strong enough to absorb all of the excess demand at that price level. Wait for that indication before you sell.
To see this week's trades in action, check out this week's Must-See Charts portfolio on Stockpickr.
-- Written by Jonas Elmerraji in Baltimore.
At the time of publication, author was long AAPL.
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.
Follow Jonas on Twitter @JonasElmerraji