Stock Quotes in this Article: BAC, DIS, F, KMB, NI

BALTIMORE (Stockpickr) -- Just a few days after 2012’s biggest single-day loss in the S&P 500, Mr. Market decided to about-face and post the biggest single-day gain of the year yesterday. All told, the S&P shoved 2.3% higher in Wednesday’s session -- that’s one heck of a bounce.

And early action in this morning’s session indicates that there’s more to come…

Surprise rate cuts in China are being given credit for the buying pressure this morning, as the People’s Republic seeks to encourage growth amid a slowing economy. Central bank stimulus is getting a whole lot of attention this week in general, from George Soros’ comments about what the EU needs to do to fix its problems to speculations about QE3 from the Fed.

But ultimately, the bounce in the broad market looks a whole lot more like a technically driven oversold bounce than anything else. That’s why we’re focusing on the technicals of five breakout stocks that are set to take advantage of the bounce this week.

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    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 big names that are telling important technical stories. Here's this week's look at the technicals of five big stocks ready to move higher.

    Disney

    First up this week is entertainment giant Disney (DIS), a firm behind characters like Mickey Mouse and divisions that include ESPN and Pixar. Disney has been showcasing tremendous relative strength in the past six months, rallying more than 21% year-to-date; the S&P has only gained 4.6% over that same period. Now, it looks like Disney is primed for bigger gains.

    Disney is currently forming an ascending triangle pattern, a setup that’s identified by horizontal resistance above shares at $46 and uptrending support below them. Essentially, as DIS bounces in between those two technical levels, it’s getting squeezed closer and closer to a breakout above that $46 resistance level. When that happens, we’ve got a buy signal for this stock.

    Momentum, measured by 14-day relative strength index, adds some extra confirmation to this setup -- it’s been locked in an uptrend itself since DIS’ April swing low. That’s a good sign considering that momentum is a leading indicator of price, still, I’d recommend waiting for $46 to get taken out before becoming a buyer.

    Bank of America

    Banking giant Bank of America (BAC) is making technical moves of its own right now. Shares are up big in early trading after rallying more than 7.6% in yesterday’s trading session – and higher ground could be a regular occurrence in the near-term for shareholders of this controversial stock. Here’s why…

    Bank of America had been forming a short-term double-bottom pattern for the past couple of weeks, indicating that the downtrend shares have been in since March is reversing. Wednesday’s massive white candle shoved BofA’s price up above the breakout level for the pattern, giving traders a buy signal for shares this morning.

    RSI is confirming the upside move again in BAC; the momentum indicator’s downtrend broke a couple of weeks ago, starting on an uptrend as the double-bottom formed in price action. If you decide to go long Bank of America here, I’d recommend keeping a protective stop below the pattern at $6.80.

    Ford Motor Company

    Ford Motor Company (F) is showing a very similar setup right now -- it’s just not quite as far along.

    The double bottom pattern in Ford is a lot like the one in BofA, but it’s a longer-term setup, and it’s still below the breakout level at $10.85 that provides a buy signal for this trade. It’s entirely possible that we’ll see that buy signal happen in today’s session. Remember though, until shares of Ford push above that $10.85 level, this isn’t a high probability trade.

    Here again momentum is adding some confidence to the likelihood of this setup. RSI broke the long-term downtrend that it had been in since back in January, a sign that prices for Ford are finally rising at an increasing level. If you decide to take the Ford trade, I’d recommend placing a protective stop just below the $10 mark.

    Kimberly Clark

    Paper maker Kimberly Clark (KMB) is another stock that broke out in yesterday’s wildly bullish session. Shares of the firm had seen a reasonably strong showing in 2012, climbing around 10% even while the broad market was struggling to hold its ground. For the last month and change, shares had been consolidating in a rectangle pattern, a formation that’s common after a large price move.

    The rectangle gave KMB investors a chance to absorb the big rally in April before deciding what to do with their positions.

    The breakout in KMB above the rectangle’s resistance level at $79 is a buy signal for shares of this stock, even though shares have climbed a bit above that resistance price at this point. KMB shareholders should look to $77 as a critical stop loss level -- after all, it’s a price level where there’s historically been a glut of demand for shares of KMB. If this stock suddenly can’t catch a bid at $77, it’s time to exit longs.

    NiSource

    Natural gas and power utility NiSource (NI) is forming a pretty conspicuous pattern of its own right now, having been locked in a channel up for all of 2012. With shares of NI lingering around trendline support in this morning’s session, now looks like a good time to be a buyer.

    Basically, a trendline support level is a dynamic support level that shows traders where demand is for shares of NI. And because NI’s price has been continually increasing along that trendline, it’s clear that buyers are in control of this stock right now. The optimal entry point on this trade comes when NI bounces off of trendline support – keep in mind that trendlines to eventually break, and when they do, we don’t want to be left holding the bag. By waiting for shares to catch a bid at trendline support before buying, we’ve got a signal that the line is still valid before putting money on the line.

    The 50-day moving average has been a picture-perfect support level over the course of this pattern -- that gives us an easy-to-define stop loss level to use on this trade. A breakdown below the 50-day tells us if we were wrong on this trade.

    To see this week’s trades in action, check out the High Volume Technicals portfolio on Stockpickr.

     

    -- Written by Jonas Elmerraji in Baltimore.

     

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    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.