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BALTIMORE (Stockpickr) -- It’s official -- two of the three major indices have plowed back to positive territory for the year. That’s a significant shift considering the fact that the broad market was making new 52-week lows earlier this month. As a result, trading opportunities are increasing dramatically this week.
I did say two of the three. The laggard, the staid S&P 500, isn’t far off from breaking into the black this year either -- it’s a mere 0.27% away from breakeven. What caused this sudden shift in stocks? Well, it wasn’t any sort of reconciliation in Europe, or a fix on the domestic economy. Instead, it’s had a lot more to do with the breakout above the staunch 1225 resistance level in the S&P 500 late last week. That’s a level we’ve been watching for a while now.
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Earnings have been another important factor (barring outlier names such as Netflix (NFLX), of course). Investors effectively ignored strong earnings during the first two quarters of 2011, selling the market significantly lower in spite of firms’ beating Wall Street estimates by a massive margin. Brushing off three straight quarters of earnings would have been a tall order, even for this market.
To take advantage of newfound momentum, it’s time to turn to the technical.
Technical analysis is a way for investors to quantify qualitative factors, such as investor psychology, based on a stock's price action and trends. Once the domain of cloistered trading teams on Wall Street, technicals can help top traders make consistently profitable trades and can aid fundamental investors in better planning their stock execution.
Here’s a look at five new technical setups that could deliver breakout gains to your portfolio this week.
Alcoa (AA) always gets attention during earnings season -- after all, the $11.3 billion aluminum producer is traditionally the firm that kicks off earnings for the quarter. But while Alcoa’s earnings are behind it now, traders should still be paying attention to the technical setup that’s shaping up in shares.
That’s because Alcoa is forming an ascending triangle, a bullish setup that currently has resistance right around the $10.50 level. Essentially, the formation works like this: With a horizontal resistance level acting as a sort of “price ceiling” above shares, and uptrending support below, Alcoa’s price is getting bounced between two key technical levels. As prices absorb some of the excess supply of shares on bounces off of their static resistance level, the chances for an upside breakout increase dramatically.
Alcoa’s trade to watch is a breakout above that $10.50 price. When that happens, the upside price target is the dotted line parallel with the triangle’s lower bound.
As of the most recently reported period, Alcoa is one of the top holdings of Bruce Kovner's Caxton Associates.
One notable thing about this week’s technical trading opportunities is just how similar many of them look. By and large, we’re looking at stocks that are threatening to break out after bottoming early in October. Part of that is thanks to the excessively high correlations that continue to keep asset classes in lockstep with one another.
A perfect example of that is Juniper Networks (JNPR), the $12 billion IT networking firm.
Juniper bottomed at the start of October, signaling a reversal with the bullish engulfing candle that thrust shares back to the $18 level. This stock has seen strong resistance at $22 since early August -- and that level finally got tested again yesterday. Positive continuation this morning would generate a buyable signal for shares.
The major gap in Juniper from July essentially opens up a pretty large void where shares haven’t changed hands – that opens up the upside for a more significant price target just shy of $30 for swing traders. On that trade, I’d suggest placing a protective stop just below the 50-day moving average.
United States Oil Fund
Now, onto oil. Crude prices have been under considerable pressure in the last few months, ostensibly shoved lower by the double-tap of weak economic demand and a Treasury-fueled strong dollar. But cash could be starting to flow back into commodities again as both of those factors start to unwind. The Fed is running out of tools right now to ratchet up bids for Treasuries -- as a result, alternatives such as commodities should benefit.
There’s a good example of that in the United States Oil Fund (USO), the de facto ETF of choice for investors looking to get exposure to oil prices. USO showed off strong price action yesterday, breaking out over the $35 resistance level that had taunted traders for most of the summer.
While a positive divergence in the 14-day RSI tipped off some early upside bias in oil prices, the actual buy trigger hasn’t been tripped until now; as with Juniper, that breakout could get confirmed this morning. Also like Juniper, the most logical technical level for a protective stop is the 50-day moving average.
USO is one of the holdings of Wilbur Ross' Invesco Private Capital.
PowerShares DB Oil ETF
Another oil ETF that’s (not surprisingly) showing a similar setup is the PowerShares DB Oil ETF (DBO). There are a few structural differences between USO and DBO -- the most notable being the expense ratios and the way each fund deals with roll yield on the futures contracts they use to track the price of oil. That’s most evident in DBO’s technicals right now: This fund is at an earlier stage than its more popular peer.
For DBO, the price level to watch is $27. A breakout above that level makes for a solid entry opportunity on this name. Of the two oil funds, DBO is showing less technical strength than USO. That said, it’s the better choice for traders looking for a second chance at a breakout.
Bank of America
Finally, it’s worth revisiting Bank of America (BAC), a big name from last week’s spotlight on banks. BofA has been in the headlines for all the wrong reasons lately, drawing ire from consumers and investors alike. But the trading setup in shares is still decidedly bullish.
The inverse head-and-shoulders we looked at last week completed its right shoulder in the days since, bringing this stock significantly closer to a breakout above the neckline. Regardless of what you may think about bank stocks, a rising tide could lift all ships this week -- and exhaustion among BofA sellers is palpable in this pattern.
Wait until shares break out above the neckline before taking a position in this stock. Then, I’d recommend keeping a tight stop just under the right shoulder -- headline and fundamental risks haven’t disappeared just because this setup looks promising in the short term.
To see these plays in action, check out the Technical Setups for the Week portfolio at 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.