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BALTIMORE (Stockpickr) -- The big indices posted their best first quarter in more than a decade in the three months ended March 31. So can they do it again?
The S&P 500 climbed a full 12% in the first quarter, itself shy of the massive 18.7% rally that we saw in the Nasdaq Composite over that same period. That’s some pretty staggering performance, especially when the weak trading of the latter half of 2011 is taken into account. And now, late-to-the-game investment managers are scrambling to match those returns -- after all, anyone who entered 2012 with a conservative bent is trailing the market big-time right now.
Whether Mr. Market can continue this rally is another story. At this point, the macro technical picture is still looking strong, despite less appealing fundamentals in markets like China. Earning season’s start later this month could rekindle the fundamental argument for buyers to keep buying.
In the meantime, we’re focusing on those technicals factors to take a look at five breakout trades this week.
For the unfamiliar, 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 a handful of technical setups that could deliver breakout gains to your portfolio this week.
First up this week is Amazon.com (AMZN), a Nasdaq stock that’s been trailing its high-flying index year-to-date. Even though Amazon has made leaps and bounds in the last few weeks, it has still only earned investors 14% on the year, vs. that 18.7% that the Nasdaq Composite turned out.
Still, the technicals point to more upside for shareholders of this $90 billion e-tailer in April.
Amazon is coming off the heels of a double-bottom pattern right now, formed by a bottom right at the turn of the year, then another at the start of March. Those two bottoms are a bullish sign for investors right now; they indicate upside in shares. Amazon actually broke out late last month (a buy signal), only to come back down to its breakout level in the last few trading days.
While that price action looks ominous, it’s actually a good thing.
The return to Amazon’s breakout level is called a throwback -- it’s a phenomenon that occurs when a stock breaks out only to return and test newfound support at their throwback level. Throwbacks are actually a positive because they give traders a chance to reaffirm support (at $198 for Amazon), and they give latecomers a second chance at a low-risk entry in shares.
I’d recommend buying AMZN on a bounce off of the $198 breakout level.
I also featured Amazon, which shows up on a list of JPMorgan's 24 Stocks That Are More Attractive Than Apple, recently in "5 Breakout Trades to Take From Twitter."
Research In Motion
Unlikely as it may seem, a similar setup is shaping up in shares of Research in Motion (RIMM). RIMM has been Wall Street’s whipping boy for a while now, and for good reason -- the firm’s deteriorating business has been the biggest catalyst behind its 74% decline in the last 12 months.
So does the double bottom in RIMM scream “buy now” to investors?
Not just yet. RIMM’s shares are still well below their own breakout level at $18 – they’d need to actually exceed that price for traders to be assured that the glut of supply of shares above $18 has been absorbed by buyers. Until that breakout level gets taken out, I’d recommend sitting on the sidelines.
We are getting some bullish evidence from RIMM’s momentum right now -- 14-day RSI has been in an uptrend since mid-December. Because RSI is a leading indicator of price, that’s a good sign for RIMM buyers – but not a good enough sign to buy shares before they push above $18.
While the level of RIMM hatred on Wall Street does send off some contrarian sparks, it only becomes a high-probability trade on a push above $18.
Small-cap REIT Dynex Capital (DX), one of the top-yielding real estate stocks, has been getting a lot of attention lately, ranking as one of the most-searched stocks on TheStreet yesterday. A lot of that attention has come from DX’s massive dividend payout -- shares currently yield 11.64%. But there’s a technical story in this stock as well.
Dynex is currently forming an ascending triangle setup, a pattern that’s formed by horizontal resistance and uptrending support. Essentially, the pattern works like this: as shares bounce in between those two technically significant price levels, they’re getting squeezed closer and closer to a breakout above that resistance level. When that happens, traders have a buy signal on their hands.
The resistance level to watch in Dynex is $9.62, the price shares closed at in yesterday’s session. To justify buying, it makes sense to wait for a confirmed breakout -- that means holding out until DX posts a second consecutive open above that price. Waiting for confirmation avoids the whipsaws that can be caused by large orders temporarily impacting prices, something that’s a particularly big risk in small-caps.
If you do take this trade, I’d recommend keeping a protective stop just below the 50-day moving average.
American International Group
American International Group (AIG), the controversial insurance giant, is another name that’s looking bullish from a technical standpoint in April. Shares starting forming a rounding pattern at the start of March, and a confirmed breakout in yesterday’s session points to some more legs to the 34% rally AIG has enjoyed year-to-date.
Typically, a rounding pattern is seen at the bottom of a firm’s price action (there, it’s better known as a “rounding bottom”). The pattern in AIG is a good example of why it’s never a good idea to just memorize the rules associated with popular patterns -- instead, it’s much better for traders to understand what actually causes them.
In the case of AIG’s rounding pattern, this setup indicates a gradual shift in control from sellers to buyers. The breakout level comes in at the resistance level where the pattern began; that’s significant because that $30.50 resistance level is a price where AIG’s uptrend got derailed.
So we know that there’s a glut of supply of shares at $30.50 where sellers are more eager to sell and take gains than buyers are to buy. Yesterday’s breakout above that price level now tells us that the excess supply has finally been absorbed by buyers.
If you decide to take this trade in AIG, I’d recommend keeping a protective stop at $28 support.
Last up is Express Scripts (ESRX), a stock that rallied yesterday following news that the firm’s planned merger with Medco Health Solutions went through successfully. The merger had been a major black cloud over the firm, as regulatory interference could have been costly for the firm. Now, with investor ennui shaken out of ESRX, this stock is in breakout mode.
Shares of ESRX had been consolidating in a channel for much of 2012, stuck in between a narrow range of support at $52 and resistance at $55. But the news that the Medco merger went though was enough to push ESRX through that price ceiling. That’s sending a buy signal in shares of this pharmacy benefit manager right now. The breakout keeps this stock in the uptrend that’s defined shares in 2012 -- that same uptrend should keep ESRX on track for gains in April.
If you decide to be a buyer at this point, I’d recommend keeping a protective stop at the 50-day moving average.
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.