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5 Breakout Trades for July Profits - 43595 views
The S&P 500 is consolidating to start off the week, giving investors and traders a chance to absorb and rationalize the 5.6% gains that the major index booked last week. That could mean some sideways price action is in store for the S&P -- but that’s hardly the case for all issues right now.
Last week’s shove higher has hoisted a large group of stocks to test resistance levels, setting up an abundance of actionable technical breakout trades worth putting on your radar.
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Remember, 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 this week’s setups.
Computer giant Hewlett-Packard (HPQ) has shown traders a less-than-auspicious chart so far this year. Shares of the company have slid double digits since the first trading day of 2011, sending investors running to “safer” tech names. But the price hemorrhaging could be ending soon for HP thanks to a bullish setup in shares.
Right now, HP is forming an inverse head-and-shoulders setup, with a neckline just shy of $38. The inverse head and shoulders demonstrates exhaustion among sellers, who’ve largely been shaken out by this point. Now, as value starts to become a reasonable investment case for HP, buyers are starting to come back into shares.
The inverse head and shoulders in HP isn’t complete yet -- the stock hasn’t formed a definitive right shoulder yet. But traders shouldn’t get overly absorbed in seeing this stock form a textbook chart pattern. Instead, this setup is a lot like the inverse H&S we saw in Lululemon (LULU) that generated upwards of 15% gains for those who took the trade.
Wait for HP to hold above $38 before buying.
A similar setup is rounding out in shares of entertainment content name Viacom (VIA) (VIA.B), one of TheStreet Ratings' top-rated media stocks. More to the point, the setup in Viacom is a rounding bottom, a formation that can be a lot like the inverse head-and-shoulders setup in both appearance and outcome.
In Viacom’s case, Class B shares had been unable to break above resistance at $51 and change until this week. Now, with overhead supply of shares absorbed by buyers, this stock could have further upside in store.
Those Class B shares are at an all-time high right now, a level that has considerable psychological significance. For starters, a high (be it all-time or 52-week) means that all current holders are sitting on gains, a factor that generally reduces selling pressures. Better still, high prices statistically lead to outperformance. Keep a protective stop just below the 50-day moving average.
All of that said, Viacom has made a major move upward in the last couple of weeks. I’d suggest waiting for another thrust upward before picking up shares.
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Enerplus (ERF) is another stock that’s testing resistance right now, albeit with a completely different pattern. Shares of this oil and gas exploration stock have been forming an ascending triangle setup for the better part of the last year. Now shares could potentially be a breakout trade this month.
An ascending triangle is a setup that’s marked by a horizontal resistance range to the upside, with uptrending support below. As shares get squeezed between those two technically relevant levels, the chances for a breakout above resistance increase dramatically. As with any breakout trade, the key to profiting is to actually wait for the breakout to occur before buying.
In the case of Enerplus, that buy signal comes on a push above $33. If and when this trade triggers, keep a protective stop just below the 200-day moving average.
Enerplus is one of the highest-yielding energy stocks.
A shorter-term example of an ascending triangle is taking place right now in shares of mid-cap health insurer HealthSpring (HS). Shares of HealthSpring have already rallied a whopping 82% year-to-date, but an ascending triangle breakout could mean even more upside in the latter half of 2011.
Resistance is currently at $48, a level that shares pushed through around noon in yesterday’s trading session. If shares can hold above that price during the first hour or two of today’s session, consider HS a short-term technical buy. I’d recommend a protective stop just below the pattern at the $46 level if you do decide to take this trade today.
Chipotle Mexican Grill
There’s a reason why Chipotle Mexican Grill (CMG), one of TheStreet Ratings' top-rated restaurant and hotel stocks, has been a Wall Street darling for the past few years. While restaurant stocks languished in the depths of the recession, Chipotle was one of the few names in the casual dining business that actually managed to deliver growth. Investors haven’t forgotten the upside on Chipotle, but traders should be paying attention to shares for a completely different reason.
This week, shares of Chipotle are testing trend line resistance, threatening to break above the trend channel that’s bounded shares since last year. Keep in mind that this isn’t the first time Chipotle has tested resistance -- that’s how the channel’s upper bound was formed, after all. We’ll want to see shares break above that blue line before it makes sense to become a buyer.
If shares end up reversing lower, there’s still a trade to be had. Wait for shares to make their way back down to trend line support, then buy on the first sign of a bounce. In both of these scenarios, don’t try to anticipate Chipotle’s price action -- wait for it to trigger first, then follow your trading plan.
To see these plays 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.