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5 Breakout Trades to Take From Twitter - views
BALTIMORE (Stockpickr) -- We may be in the middle of a rally, but some stocks are seeing more of it than others. While the Nasdaq posted gains of 0.75% in yesterday’s session, the Dow barely broke even. To help separate the wheat from the chaff, we’re turning to Twitter today to find five new names worth trading.
Since its introduction, the microblogging tool has been popular among traders looking to share investment setups with the trading community. Today, with 300 million users, it’s reached a level of popularity that makes it an even more useful resource for investors looking to generate trading ideas in 140 characters or less.
Brevity has been a big part of Twitter’s success -- and a reason for the service’s popularity among traders. After all, it doesn’t take more than a few seconds to blast off a tweet about your latest trade, or thoughts about a significant market move. Third-party services such as StockTwits also aggregate stock market tweets in real time, providing an interesting sentiment gauge or an instant opinion on your latest position.
The Twittersphere heated up this summer when it was announced that a $40 million London-based hedge fund was now applying algorithms to Twitter to generate trading signals. That fund launch comes not too long after researchers at Indiana University, Bloomington, found that Twitter could predict up or down days with 87.6% accuracy.
While there are still some issues with relying too heavily on Twitter for trading signals (a model with high predictive ability isn’t necessarily economically viable), the site can be a good starting point for traders looking for stocks getting attention from the investing community. With that in mind, let’s look at technical setups in five stocks and ETFs that are popular on Twitter 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 Twittersphere technical setups that could deliver breakout gains to your portfolio this week.
It’s been rough going lately for online retail giant Amazon.com (AMZN). In the last six months, this $84 billion tech sector stock has seen its share price drop by more than 23% while the broad market has rallied by 17%. That’s startling underperformance for such a major, front-of-mind stock.
But AMZN shareholders could soon see their fortunes changing.
That’s because this stock is forming an ascending triangle bottom in shares right now, an indication that AMZN’s stock price could be primed to move higher. In an ascending triangle, two key levels are impacting share prices: a horizontal resistance level to the upside and uptrending support to the downside.
As shares of Amazon bounce in between those two technically significant price levels, they’re effectively getting squeezed closer and closer to resistance. A breakout above that resistance level is a buy signal.
Normally, an ascending triangle is a continuation pattern (it appears in the middle of an uptrend), but in this case, it’s a reversal pattern (signaling the end of a downtrend). Despite the difference, the trading implications are exactly the same; it makes sense to buy on a break above $196.
Amazon, one of Renaissance Technologies' holdings, shows up on a list of JPMorgan's 24 Stocks That Are More Attractive Than Apple.
Panera Bread (PNRA) is a more classical example of an ascending triangle setup at work. Shares of the café broke out above $160 resistance just last week, signaling a “buy” for traders as shares of Panera pushed through a price that has previously been a ceiling for shares.
In a more real world sense, you can think of price action in terms of supply and demand. Resistance levels like $160 are places above which there’s a glut of demand; above those levels, sellers are more eager to sell and take gains than buyers are to pick up shares at higher prices. So when demand overwhelms supply at a former resistance point, Mr. Market is selling a pretty big message to investors that buyers are in control.
So what’s been happening in shares of Panera?
After breaking out, shares have actually pulled back in the past few trading days, a phenomenon known as a “throwback.” While a throwback seems like a negative at first glance -- shares are moving lower, after all -- it’s actually a good thing because it shows traders whether PNRA can hold newfound support at its former $160 resistance level. If it can, we have reassurance that this stock can still catch a bid at support, and traders who were late to the game get another shot at a low-risk entry in shares of PNRA.
I’d recommend waiting for a bounce off of $160 (to verify that support is still valid there) before buying into Panera’s rally this month.
Meanwhile, there’s another type of setup brewing in shares of chemical and drilling tool firm Flotek Industries (FTK). Flotek has been consolidating sideways for all of 2012, doing a whole lot of nothing as investors weight their options following the rally that more than doubled this stock’s share price in the final quarter of 2011. While FTK consolidates sideways, we’re looking at an if/then trade in shares.
Put simply, an if/then trade is a setup whose direction is contingent on which way FTK breaks out of its channel. So if FTK breaks out above $13 resistance, then we’ve got a buy signal. Otherwise, if FTK breaks below $10 support, then this stock becomes a short candidate.
Right now, FTK is testing our $13 resistance level. That price could get taken out this week.
While an if/then setup doesn’t have the same sort of directional bias we’d get from an ascending triangle, there are some other clues as to this firm’s intentions. Momentum, as measured by 14-day RSI, is giving us some extra evidence in favor of an upside breakout after breaking its downtrend; momentum, after all, is a leading indicator of price.
Even so, I’d recommend waiting for $13 to actually get broken before becoming a buyer.
Cobalt International Energy
Cobalt International Energy (CIE) is another if/then trade that’s trending on Twitter right now. This $13 billion independent oil company is another name that’s seen its shares rally extremely hard this year, more than doubling already in 2012 after a key deal penned in Angola and a series of high-profile analyst upgrades.
So how do you trade this stock going forward?
Again, the keys to the castle are found in the horizontal resistance and support levels that have defined this stock’s consolidation channel to date. Shares are testing $35 resistance this week, but investors shouldn’t ignore support at $29. Ultimately, a break through a major glut of supply or demand should dictate buying in this stock, nothing else. That’s why it’s necessary to wait for CIE to actually exit its channel before this stock becomes a high-probability trade.
Either way this trade progresses, I’d recommend keeping a protective stop just back within the channel to protect against an unforeseen move in this stock.
Cobalt shows up no a recent list of 15 Best Stocks at Top-Performing Mutual Funds.
Last up on today’s list of Twitter trades is semiconductor firm Cree (CREE). Cree is currently forming a well-known setup in shares: an inverse head and shoulders pattern. The inverse head and shoulders may get plenty of attention from its “interesting” name, but as with any technical pattern, the core of this setup still comes back to supply and demand.
The inverse head and shoulder pattern in a bullish formation that indicates exhaustion among sellers -- and looking at Cree’s chart over the course of the last several months, sellers have a lot to be exhausted for. The setup is identified by two intermediate troughs (the shoulders) that are separated by a deeper trough (the head). The resistance level that the head and shoulders return to is called the neckline -- it’s the breakout level that signals a buy if it’s breached.
That’s exactly what Cree managed to pull off in yesterday’s session, shoving its way above the neckline. Now we’ll want to see that shares can hold above that neckline in today’s session. If so, the breakout is considered “confirmed,” and it makes sense to be a buyer.
If you take this trade, I’d recommend putting a protective stop just under the right shoulder at $27.
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.