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5 Breakout Trades From the Eurozone - views
BALTIMORE (Stockpickr) -- Love it or hate it, Europe has traders’ attention this week.
The eurozone drama has perked back up in the past couple of weeks, driven in large part by the spike in risk premiums that bond investors are demanding from Spanish and Italian debt. I’ve said before that I think Europe is a bit of a red herring for the market’s moves – fundamentally, the argument that fundamentals in the EU are changing valuations here at home doesn’t jive with the way stocks have traded in the last two months.
But I do think that Europe is flipping the “risk switch” on and off in April; the rapid increase in the Euro STOXX 50 Volatility Index compared to the VIX adds some extra evidence of that. With bigger moves coming into play across the pond, it makes sense to focus on attractive technical setups in eurozone stocks 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 five European technical setups that could deliver breakout gains to your portfolio this week.
First up this week is Swiss insurer ACE (ACE). Even though ACE isn’t technically located in the eurozone, the firm has massive exposure to EU firms. More significant, because the Swiss franc is currently pegged to the euro, we can effectively lump Swiss stocks alongside the other Schengen countries.
Now onto the technical.
ACE spent all of 2012 forming a long-term ascending triangle pattern, a setup that’s marked by horizontal resistance to the upside and uptrending support below. Essentially, as shares bounce in between those two technically important levels, they’re getting squeezed closer and closer to a breakout above resistance. When that breakout happens, traders have a buy signal on their hands.
That’s exactly what happened late last week with ACE. Shares broke higher on Thursday and Friday, pushing through resistance at $74. Since then, this stock has made a throwback down to support at $74, a move that potentially gives traders a second low-risk entry opportunity in shares; it’s going to be critical for ACE to hold that support level at $74 if this setup is to stay intact.
With ACE reporting earnings tomorrow morning, I’d strongly recommend waiting for those numbers to come out before buying.
ACE shows up on a list of 5 Buy-Rated Insurance Stocks for Long-Term Investors.
Dutch chemical company LyondellBasell Industries (LYB) is another name that’s forming an ascending triangle pattern right now -- albeit in the shorter-term. LYB has been stuck below horizontal resistance at $46 since the start of February, with uptrending support making up the other requisite part of this pattern. The buy signal comes on that push above the $46 level.
In LYB’s case, we’re looking at a pretty textbook example of an ascending triangle. Besides the pattern itself, declining volume adds some confirmation for this trade -- we want to see volume decline as the pattern progresses, followed by a volume spike when the stock breaks above $46. That spike tells us that traders are participating in the move.
Another important piece of evidence in the LYB setup is momentum, measured by this stock’s 14-day RSI. RSI has been in an uptrend throughout the pattern, which suggests that buying is intensifying as LYB approaches resistance. That’s an especially strong sign given that momentum is a leading indicator of price.
LyondellBasell shows up on lists of 11 Oil and Gas Stocks That Define the "New Middle East" and 5 Once-Bankrupt Companies Primed for a Comeback.
It’s been a rough year for shareholders of Ericsson Telephone Co. (ERIC) -- shares of the Swedish communications firm have fallen close to 30% in the last year as telecom stocks struggled to regain share of the increasingly concentrated communications equipment market. Again, even though Sweden isn’t in the eurozone (its currency is the krona), massive corporate exposure to the euro and exchange mechanisms mean that Ericsson has the attributes we’re looking for in these setups.
After ERIC’s dramatic fall in the trailing 12 months, shares of the company have been stuck trading sideways in a consolidation channel. While that’s been a frustrating scenario for Ericsson shareholders, it does provide traders with an actionable setup right now.
Currently, Ericsson is forming an if/then trade as it bounces in between horizontal resistance at $10.50 and horizontal support at $9. We’re looking for a break outside that channel to provide a direction for ERIC’s shares. Here’s how it works: if ERIC breaks out above $10.50, then we’ve got a buy signal. Otherwise, if shares fall below $9 support, then ERIC becomes a short candidate.
Until one of those two conditions get met, I’d recommend staying away from this stock.
Ericsson showed up on a list of 6 Tech Stocks to Avoid in 2012.
As one of Germany’s biggest banks, Deutsche Bank (DB) has taken a lot of heat for its levered-up exposure to EU sovereign debt. Now, investor anxiety could be ramping up enough to spur even more selling in this financial firm. For traders, the short signal comes from a solid technical setup in shares.
Right now, Deutsche bank is forming a head and shoulders top, arguably one of the most well known technical patterns out there. The head and shoulders is formed by two intermediate peaks that take place around the same price level, separated by a higher peak in between. The pattern signals exhaustion among buyers -- and flags traders with a sell signal on a breakdown below the neckline that sits below all three peaks. In DB’s case, the neckline comes in at $42.50.
With selling coming into shares this morning, I think that we could get the short signal for this stock in today’s session. More risk-averse sellers should wait for a second-day open below the neckline tomorrow before taking a position.
Traders may notice that DB has a significant number of gaps in its price action -- these are just suspension gaps caused by off-hours trading on the Frankfurt Stock Exchange. They can be ignored for technical purposes.
Last up is NXP Semiconductors (NXPI), a Dutch chipmaker that’s forming a very similar setup to Deutsche Bank right now. Like DB, NXPI is forming a head and shoulders topping pattern, in this case with its neckline at the $22 level. A breakdown below that line means that NXPI is a short candidate.
Near-term support at the 200-day moving average (currently around $19) looks like a realistic target for this setup right now – on the neckline break, I’d suggest planning on exiting ahead of hitting that potential glut of demand for shares.
Even though the head-and-shoulders (and its inverse) is likely the most well known technical pattern, it’s still a valuable one: an 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 a good reason to keep an eye on both NXPI and DB this week.
To see this week’s trades in action, check out the Technical Setups for the Week portfolio on 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.