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5 Breakout Trades for This Crazy Market - 16678 views
BALTIMORE (Stockpickr) -- Mr. Market must not be liking the transition to positive territory for stocks in 2011 -- that’s the only way to explain the unceremonious selloff that we’re seeing to start this week.
As of this morning, major indices are off by almost 5% this week, undoing much of the prodigious rally that shoves stocks out of their trading range. And it’s not just stocks; from gold to crude oil, nearly every asset class is getting sold off this morning. Not surprisingly then, the dynamic duo of treasuries and the dollar are ratcheting higher.
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The biggest item in the headlines is the disaster that took place with MF Global (MF), a 200-year old brokerage firm that’s getting extra attention because former New Jersey governor Jon Corzine was at the helm. The firm’s downfall was heavy exposure to European debt, a factor that’s no doubt helping to reignite investor anxiety over problems in the eurozone. That’s coupled with the Greek referendum that’s threatening to yank the country from the euro -- and completely undo the European “rescue package” from last week.
Despite all of the noise being heard in the market, though, there are still technical setups worth watching right now.
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.
Chipotle Mexican Grille
It’s been a strong year for shares of Chipotle Mexican Grill (CMG) -- shares of this casual dining chain have rallied more than 58% so far in 2011. And while traders should expect a pullback in today’s session, there’s a longer-term setup pointing to bigger upside in this name.
Right now, Chipotle is forming a long-term ascending triangle, a bullish setup that’s marked by horizontal resistance to the upside and higher lows that form uptrending support below. The buy trigger comes on a sustained breakout above the resistance level, just above $340 in this case. While Chipotle had been testing that price barrier for the last few days, investors should expect share prices to contract in the very near-term. As long as prices stay within the formation, the setup remains in force.
One of the biggest things to watch in Chipotle is relative strength, the line on the bottom subchart. Relative strength measures the performance of Chipotle relative to the broad market – and thus far, relative strength has been shining in this stock. Historically, that’s a good indicator of continued outperformance in shares.
On the other side of the spectrum is Priceline.com (PCLN), the $25 billion online travel portal. Priceline’s shares have been locked in a downtrending channel since the start of the summer. The channel has proven strong -- despite several tests, shares haven’t been able to stage a push past its trend line support or resistance levels.
While the downtrending channel is an ostensibly bearish setup, the formation needs to be viewed in the context of the broad market. In spite of the selling of the last two days, the S&P 500 is still showing some upside momentum right now. That’s all the more reason to watch for a breakout above that trend line resistance level. If shares of PCLN can break out above the channel, we’ve got a buy signal on our hands.
On the flip side, a fourth bounce off of trend line resistance provides an actionable short signal for traders. That’s the more likely signal we’ll see today. Trend line support is the clear price target if we see that bounce take place. Either way this stock works out, I’d recommend keeping a tight stop on this trade.
Priceline, one of TheStreet Ratings' top-rated Internet catalog and retail stocks, is one of the http://stockpickr.com/pro/portfolio/chase-coleman-tiger-global-management/ ">top holdings of Chase Coleman's Tiger Global Management as of the most recently reported period.
Another example of a downtrending channel is taking shape in shares of Skyworks Solutions (SWKS) right now. Unlike Priceline, Skyworks’ channel is steeply angled downward, and shares have already completed a bounce off of resistance. That makes this stock a solid short candidate this week.
Again, trend line support at the bottom of the channel marks our high-probability price target right now. While shares have previously done a good job of actually moving all the way down to that price level before reversing higher, I’d recommend covering just above support in order to get a more conservative trade. Keep a protective stop just above trend line resistance -- currently at $22 -- to defend against a sentiment shift.
Skyworks shows up in TPG-Axon Capital's portfolio as of the most recently reported period.
A less directional channel is shaping up in shares of NVR (NVR), a mid-cap homebuilder. NVR has been trading sideways in a channel since the early August selloff in the S&P 500, and shares failed to break out above that range when the broad market did last week. Now the question is when the breakout will happen in this name.
Because NVR is still stuck in a horizontal channel, it’s forming a setup that I like to call an “if/then trade”. Essentially, it works like this: If shares breakout above resistance at $660, then buy. If shares break down below support, then sell short. While horizontal channels normally carry less directional bias, the upside breakout is the more likely of the two scenarios right now.
That’s thanks in large part to the bullish confirmation in 14-day RSI that’s been underlining the strength of the latest leg upward. Right now, this stock is testing resistance. Still, I’d expect a little bit more waiting at the hands of this recent bout of market weakness.
Finally, let’s take a look at Juniper Networks (JNPR), a trade that we looked at in last week’s column. At the time, we were looking at a breakout above $22 resistance in Juniper, and sure enough that’s what we got: since that buy trigger, shares have rallied 12.8%.
We’re still only halfway to the target price that we were looking at last week -- but the fact that we’re approaching the entrance of this stock’s major gap is likely to kill off some upside momentum. So how should you trade this tech name now? For more conservative traders, I’d recommend taking gains here -- or at least scaling down in anticipation of a push through the gap. More aggressive traders can hold out for that sub-$30 target.
If you hold onto a position in Juniper, I’d recommend ratcheting up a stop to that $22 level. A fall below that price means that sellers have regained control of this stock.
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.